Choice of applicable law in an international treaty

Mainstream

Choosing the applicable law is not a tick in the contract template. It is a strategic risk management tool.

The main task is not just to agree on the right, but to determine in advance what rules will be used to evaluate the transaction, what rights, obligations and protections will be available to the parties, and – most importantly – whether the future decision will be realistically enforceable.

Effective choice of law begins with three questions:

What legal system gives the most predictable and fair result for this type of transaction?Where in the event of a dispute will the case be considered and how the chosen right will be correctly applied by the court or arbitration?What mandatory rules, sanctions restrictions and features of public order in Russia and CIS countries will affect the result?

If these three issues are not resolved before signing, the business may find that the agreed right proves useless, the dispute will drag on, and the decision will prove unenforceable in the right jurisdiction.

When the choice of applicable law is required

The choice of applicable law becomes critical if:

• the counterparty is located in Russia, Belarus, Kazakhstan or another CIS country
• Contract execution is planned in the territory of the Russian Federation or CIS
• Delivery to or from Russia
• subject of the transaction – goods, services, EPC contract, distribution, license, loan, investments
• The parties have different negotiating positions and legal background
• the contract contains an arbitration clause (ICAC at the CCI of the Russian Federation, ICC, LCIA, SCC, etc.)
• One side insists on English law, the other on Russian law.
• There is a risk of sanctions restrictions, exchange controls or blocking regulations.
• The transaction affects the national interest or strategic industries.
• The dispute may be considered by the state court in the Russian Federation or the CIS in the future

A mistake that most parties make

Many companies ask the question:

Which right is better, Russian or English?

That's the wrong question.

The right question is:

What right, taking into account the specific contract, the place of dispute, the debtor’s assets, mandatory rules and future recognition of the decision, will create the maximum protection for the business?

Sometimes the best choice is Russian law with arbitration in Moscow. Sometimes it is English law, but with a clear mechanism for taking into account Russian mandatory norms. Sometimes it is a third, neutral jurisdiction. Sometimes it is advisable to combine the substantive law of one country and the procedural mechanism of another in one treaty.

Step 1. Understand what is really affected by the applicable law

Applicable law does not define an abstract “legal shell”, but rather the specific rules of the game:

• validity of the treaty, its conclusion and interpretation
• The scope of the rights and obligations of the parties
• breach
• grounds for exemption from liability (force majeure, hardship, sanctions)
• the procedure for accruing interest, penalties, fines
• Possibility of recovery of losses, lost profits, indirect losses
• Limitation periods and the procedure for calculating them
• counter-claims
• possibility of reducing penalty by the court
• Permissibility of oral changes to the contract
• Rules of Evidence and the Distribution of the Burden of Evidence (as far as substantive law is concerned)
• Effects of the Impact of Certain Provisions

Ignoring these differences causes a beautifully written contract to fail in a real dispute.

Step 2. Determine whether there is a direct indication of the right in the contract

The first thing to check is whether the contract contains an explicit choice of law.

The correct wording should be clear and unambiguous:

This contract shall be governed by and construed in accordance with the substantive law of England and Wales.

It is dangerous to rely on implied choices. References to the jurisdiction of a court or place of arbitration do not in themselves necessarily imply a choice of substantive law of that country. In Russian courts and international arbitration, the actual expression of the parties’ will will will be assessed, and this is already a zone of uncertainty.

Step 3. If the right is not chosen: Conflict of laws rules and risks for business

If the parties have not agreed on the applicable law, it will be determined by the court or arbitration on the basis of conflict of laws rules.

In the state courts of the Russian Federation, this will be Section VI of the Civil Code of the Russian Federation, based on the principle of the closest connection. For an international sales contract, it will most often be the law of the seller's country. But for complex mixed contracts, agency, distribution, construction and investment contracts, this automatic approach poses serious risks – the right will be determined after the fact and may be inconvenient for both parties.

International arbitration (ICC, LCIA, ICAC) may also apply conflict of laws rules that it considers applicable or directly select the law most closely related to the contract. Predictability in this case is minimal.

For a business working in Russia & CIS, the lack of choice of law is always a losing position, because disputes with state courts of the Russian Federation or CIS countries without an explicit legal clause can lead to the application of local law, which may contain unexpected mandatory rules.

Step 4. Compare the available legal procedures: Russian, English, and Neutral Law

There is no universally “best” right. Comparisons should be made under a specific transaction and dispute resolution mechanism.

Russian law is customary for contractors from the Russian Federation and the CIS; - well regulated contracts of supply, contract, leasing, loan; - courts and arbitration in the Russian Federation apply it without additional examinations; - there are mandatory rules on reducing penalties (Article ). 333 Civil Code), limited amount of compensation for net economic losses, formal requirements for evidence; - risk of politicized enforcement in sensitive disputes; - a number of restrictions related to currency regulation and sanctions compliance.

• English law – high degree of predictability for complex commercial contracts
• - developed practice in M&A, distribution, financing, EPC, energy
• Respect for the autonomy of the will of the parties, limited interference by the court in the contractual terms
• Effective institutions of assurances, guarantees, indemnities and penalty clauses
• - but: Requires the involvement of qualified consultants
• In the State Court of the Russian Federation its contents must be proved as fact (Article ). 1191 Civil Code of the Russian Federation, 14 AIC of the Russian Federation, which lengthens and increases the cost of the process. When considering a dispute in a Russian court with English law, difficulties may arise with establishing the content of foreign law and parallel examinations.

Neutral jurisdiction (Swiss, Swedish, Singapore) is a compromise option that reduces negotiating tension; is often used in international commodity and trade contracts; – it is necessary to take into account how familiar the chosen legal order is to arbitrators and how it interacts with the place of execution in the Russian Federation / CIS.

Step 5. The Vienna Convention (CISG) and its role for Russia and the CIS

Russia and most CIS countries are parties to the UN Convention on Contracts for the International Sale of Goods of 1980. (CISG). This means that international sales contracts between merchants from different CISG member countries are automatically applied, unless the parties explicitly excluded it.

Important conclusions follow from this:

If the parties have chosen Russian law, CISG will still be applied in the part that does not contradict the contract, and take priority over the internal rules of the Civil Code of the Russian Federation on sale and purchase if the transaction falls within its scope.If the parties have chosen English law, but the location of the commercial enterprises in the CISG member countries (for example, Russia and Germany), then CISG, as an international treaty, can be applied if the conflict of laws rules lead to the law of the member state. To avoid this, English law is often elected with the explicit exception of CISG: For business in the Russia & CIS region, ignoring CISG completely is a mistake. The Convention provides a number of practical mechanisms: notice of non-conformity of goods, rules on interest, termination, losses. The misunderstanding of its role leads to the fact that the parties argue on the right, which in fact is not in its pure form.

Step 6. Reconcile the right with an arbitration or judicial clause

The choice of law and the choice of place to resolve disputes are inextricably linked.

The effective pair looks like this:

• Russian law + ICAC at the CCI of the Russian Federation (or the state arbitration court in the Russian Federation) - if both parties are from the Russian Federation / CIS, assets in the Russian Federation and a fast writ of execution is important
• English law + ICC/London arbitration – for complex international contracts with assets abroad
• Neutral law + SIAC/VIAC/SCC – for transactions sensitive to the sanctions factor, when it is necessary to distance yourself from the Russian Federation and Western jurisdictions

It is a mistake to choose a right that the chosen court or arbitrators cannot apply competently. The Russian state court will have difficulties with detailed English law, and the London arbitration will have difficulties with the intricacies of Russian regulation of subsoil use. The strategy of choice of law must be coordinated with the procedural strategy.

Step 7. Evaluate the imperative norms, public order and sanctions restrictions of Russia and the CIS

Regardless of the chosen law, there are rules that will apply in any case if the performance or dispute affects the territory of the Russian Federation or CIS countries. This:

• Currency regulation and restrictions on settlements in foreign currency
• Regulations on registration and licensing of certain activities
• prohibition of circumvention of the law and abuse of the right
• Subsoil use, strategic societies, land
• sanctions legislation of the Russian Federation (counter-sanctions), presidential decrees, restrictions on unfriendly states
• Rules on exclusive jurisdiction of disputes in respect of real estate and a number of corporate relations
• public policy which may serve as a basis for refusing recognition and enforcement of a foreign award

Therefore, choosing a right, it is necessary to model not only positive regulation, but also the “invasion” of peremptory norms at the place of execution. Ignoring this block can make even a perfectly prescribed solution unenforceable in Russia/CIS.

Step 8. To fix the choice of law in the contract: clause

The choice of law should be expressed as clearly as possible, without reference to general principles, lex mercatoria or “justice”. It is recommended to use:

• direct reference to the substantive law of the country (without conflict of laws rules to avoid re-reference)
• If necessary, the CISG exclusion
• an indication that the law governs not only the contract but also the obligations arising from the pre-contractual relationship and non-contractual obligations associated with the contract, to the extent permissible
• separate settlement of the moment of entry into force of changes of law (in case of legislative reform)

Example of a balanced clause in a contract with a Russian element:

“This contract shall be governed and interpreted in accordance with the substantive law of the Russian Federation without the application of its conflict of laws rules. United Nations Convention on Contracts for the International Sale of Goods, 1980 not applicable.”

Depending on the strategy, the parties may choose to leave CISG.

Step 9. Check the impact of the chosen right of limitation, interest, damages and sanction compliance

Prior to the final choice of law, due diligence of the applicable law should be carried out with respect to business critical parameters:

• Limitation period (in English law – 6 years for simple contracts, in Russian – 3 years, but there may be features)
• possibility of recovery of pre-estimated damages (liquidated damages) and the risk of their reclassification into a fine / penalty
• annual interest rates before and after the decision
• admissibility of assignment of rights, pledge, guarantees
• Sanctions clauses and their legal consequences: under English law, sanctions clauses are widely used, under Russian law, sanctions of foreign states are not directly valid, but may be affected by counter-sanctions decrees, which creates a risk of non-performance of obligations when referring to foreign sanctions.

This analysis avoids a situation where the agreed right does not give the creditor the rights it expected.

Step 10. Selection strategy: stability, predictability, and fulfillment

Strong choice of law is a balance of three components:

Legal certainty – the right should give unambiguous answers to key issues for the transaction.Procedural compatibility – the right must be “native” or well known to the court or arbitration that will consider the dispute.The feasibility of the final decision in the jurisdiction where the defendant’s assets are located is especially important when the assets are located in Russia or the CIS.

Russian law or English law: Not a better/worse table, but a test by criteria

The answer is not universal and depends on who your counterparty is, where your assets are, and what path you take in the event of a conflict.

Common mistakes in choosing the applicable law

1. Choose the right to “like everyone else” without analysis. English law in a contract between a Russian and Kazakh company with arbitration in Moscow can result in expensive expertise and unpredictability.
2. Do not exclude CISG when necessary. Then the Convention automatically applies to the contract of sale, and the usual norms of the Civil Code recede into the background.
3. Mixing law and process. “Disputes are heard under English law in the Arbitration Court of the City of London. This design is procedurally non-working, because the state court applies foreign law only in certain cases and with proof of its content, which dramatically slows down the process.
4. Do not check the mandatory rules of the country of execution. Even English law will not protect against Russian currency controls or a ban on dividend payments to unfriendly non-residents.
5. Ignore the sanctions factor. The choice of law that makes unilateral refusal due to sanctions legitimate in Russian jurisdiction can be considered void as circumvention of counter-sanctions norms.
6. Not agree on the mechanism of change of law. The legislation is changing and the parties need to understand what version will be applied.
7. We are to rely on the “reasonable and just.” General principles without a specific legal system create maximum uncertainty.

Checklist: 15 Questions for Choosing the Right Applicable Law

1. From which countries and where are their commercial enterprises located?
2. What type of contract is concluded (purchase and sale, services, EPC, distribution, loan)?
3. What are the key commercial risks (delay, quality, loss, withdrawal)?
4. Does the Vienna Convention (CISG) automatically apply to the treaty?
5. Do the parties have legal preferences and what are the grounds for them?
6. Where the dispute will be considered: State Court of the Russian Federation/CIS, International Arbitration?
7. How competent is the chosen court or tribunal in applying the proposed law?
8. Where are the main assets of the potential defendant?
9. What mandatory rules of the country of execution may affect the contract?
10. Are there sanctions risks on both sides of the deal?
11. How does the chosen law regulate statutes of limitations, interest, penalties, losses?
12. Will the law effectively recover legal and legal costs?
13. How likely is it that the decision is enforced in the Russian Federation/CIS?
14. Will a foreign law need proof before a local court and how much does it cost?
15. Does the combination of law + arbitration / court strike a balance between predictability and enforcement?

What a strong choice of law strategy looks like

A strong strategy is multi-level:

1. Commercial analysis. Understanding business purpose, risk tolerance, bargaining power.
2. Legal mapping. Comparison of two or three legal orders on key institutions for the transaction.
3. Dispute scenario modelling. Forecast: How will the dispute develop in court and arbitration under each option of law?
4. Enforcement perspective. Assessment of the feasibility of the future solution in Russia, CIS and other relevant jurisdictions.
5. Regulatory & Sanctions Overlay. Imposition of mandatory and sanctions norms of the Russian Federation and the counterparty.
6. Drafting precision. Fixing the choice of law, the exclusion of uncertainties and contradictions.

FAQ

Which right is better to choose for a contract with a Russian company?The answer depends on the specific transaction. If the assets in Russia and the dispute are likely in Russian arbitration, Russian law is often preferred. If you need neutral law and arbitration abroad, can be chosen English, Swiss or Swedish law, but with mandatory consideration of the mandatory norms of the Russian Federation.

Is it possible to subordinate the contract to English law if both parties are Russian?As a general rule, yes, if the contract is complicated by a foreign element (for example, execution abroad). But if the contract is entirely domestic Russian, the choice of foreign law may be limited. In purely Russian relations, a state court can ignore such a choice and apply Russian law.

If you deliberately want to apply Russian or English national law without additions to the CISG, yes, it should be explicitly excluded. If you want to use CISG as a supranational regime, leave it in place.

English law may provide legal grounds for suspension of execution due to sanctions. However, in the Russian court such reservations may not be accepted if they contradict the counter-sanctions regulation. The strategy must take into account this contradiction.

Can the applicable law be changed after the conclusion of the contract? However, it is important to ensure that such a change does not infringe the rights of third parties or is not made to circumvent peremptory norms.

Related services

• International Trade, Distribution and Cross-Border Transactions with Focus on Russia and the CIS
• International Arbitration, Commercial Disputes and Cross-Border Litigation
• Commercial contracts under Russian and English law
• Sanctions, export controls and international compliance in Russia and CIS
• Execution of foreign court and arbitration decisions in Russia and CIS
• Corporate and Regulatory Investigations, Business Integrity in the Region

Related material

• How to choose an arbitration clause for an international treaty
• International Arbitration in Russia: ICAC, ICC and ad hoc
• 1980 Vienna Convention: What Businesses Need to Know
• Russian law vs English law: comparison
• Sanctions clauses in contracts with Russian element Mandatory rules in transactions with Russia and CIS countries
• How to execute a foreign arbitration award in Russia
• Choice of law and arbitration in EPC contracts involving CIS
• Practical Mistakes in Choosing Law on Dispute Statistics
• Proof of foreign law in Russian courts

Conclusion

The choice of applicable law in an international commercial contract is not a technical formality, but a commercial and procedural decision that determines the outcome in a conflict situation.

For businesses working with Russia and CIS countries, this choice should not be based on fashion or templates, but on an accurate analysis of: What legal order, in conjunction with a specific dispute resolution mechanism, will produce the most predictable, secure and enforceable outcome? At the same time, it is necessary to take into account the mandatory norms, the sanctions context and the realities of law enforcement in the region.

The right choice of law is when a contract works not only in good times, but also when the relationship has already turned into a dispute. It is at this point that the true value of a competent legal strategy is manifested.