Russian Federation: General Rules Applicable To Russian Contractor’s Contracts

Last Updated: 2 February 2015
Article by Valentin Petrov and Petr Shevtsov

Under a contractor's contract, the contractor undertakes to perform certain work (i.e. to make or process items or to do some other work the result of which is to be handed over to, and accepted by, the customer) in accordance with the customer's instructions. There are several types of contractor's contracts, including construction contracts, contracts for the performance of survey and research works and contracts for the performance of works for state needs. Chapter 37 of the Civil Code establishes certain general rules that apply to contractor's contracts generally, as well as a number of specific rules applicable to specific types of contractor's contracts.

The Civil Code provisions allow the parties to a contractor's contract significant leeway in structuring their relationship. Specifically, the parties to a contract may determine the distribution of risks between them, the possibility to engage subcontractors, the payment schedule, the contractor's liability for failing to meet the agreed time schedule, the scope and quality of works, the scope and term of the warranty (if any) and the scope of the contractor's liability under the contract.

Paragraph 1 of Chapter 37 contains fairly extensive provisions regarding the rights and obligations of the parties and other rules governing contractor's contracts. Some of those provisions are mandatory and some are default provisions that apply unless the law or the contract provides otherwise. The following is a summary of major points – please note, however, that it does not constitute a full and detailed description of all applicable provisions.

The price under a contractor's contract is deemed to include the contractor's costs and expenses, as well as its profit. The parties may establish a fixed or an approximate price of works (it is possible to include a detailed cost schedule) to be performed under the contract. The price (or the cost schedule) is deemed to be fixed, unless the contract expressly says otherwise. If the contract price is approximate, the contractor must notify the customer of a need to perform additional works resulting in a material increase of the approximate price "in a timely fashion" (if it fails to make such notification, the contractor would have to perform the works for the originally agreed price). Upon receiving such notification, the customer is entitled to terminate the contract by paying the price of works performed by that time. As a general rule, a fixed price cannot be increased or decreased upon demand of either party, except for situations where the cost of materials and equipment provided by the contractor, as well as services rendered by third parties, increases materially and such an increase was impossible to foresee at the time when the contract was entered into. In such situations, the contractor is entitled to demand a price increase or, if the customer refuses, to terminate the contract in accordance with the rules that apply in case of material changes of circumstances. Unless otherwise provided by the contract, in case of the customer's failure to pay any amount due under the contract, the contractor is allowed to keep the contracted product or unused materials or other customer's property until the payment has been made.

The contractor is obligated to inform the customer about any defects in materials or technical documentation provided by the customer and possible negative consequences of compliance with the customer's technical instructions, as well as any other circumstances that are beyond the contractor's control and that may affect the qualify of the end-product or make it impossible to complete the works on schedule, and to suspend work until further instructions from the client. If the contractor fails to do so, it will not be able to refer to such circumstances later in its disputes with the customer. Unless the contract otherwise provides, the customer may unilaterally terminate the agreement at any time, provided that it pays the portion of the contract price proportionate to the portion of the works performed by that time. In the event of such unilateral termination, the customer would also be required to compensate the contractor for damages, capped by the difference between the total contract price and the price paid for the actually performed works.

In case of the customer's failure to cooperate as provided in the contract, the contractor may claim damages or require an increase in the contract price or an extension of the time schedule. If the performance of works becomes impossible as a result of the customer's actions or inaction, the contractor is entitled to receive the price of the already performed works. The contractor has the right to suspend or terminate works if the customer's violations of its obligations under the contract (such as obligations to provide materials, technical documentation, etc.) hinder the performance of works by the contractor.

The customer is obligated to examine and formally accept the performed works or their result in accordance with the acceptance procedure specified in the contract and to document and report all obvious defects to the contractor. Likewise, the customer should document and report all defects that are not immediately obvious within a reasonable period of time following their discovery. Generally, unless otherwise provided for by law or by contract, the work product must at the time of its transfer to the customer conform to specifications set out in the contract or customary requirements that apply to such products and shall be suitable for use in accordance with the purpose specified in the contract (or, if the use is not specified in the contract, for the use customary for such type of products) for a reasonable period of time after its transfer to the customer. If the work product has defects which make it impossible to use, the customer (unless otherwise provided by law or by contract) may require the contractor to (i) decrease the price, (ii) fix the defects within a reasonable period of time and free of charge or (iii) compensate the customer for expenses incurred in fixing the defects. Instead of curing the defects, the contractor has the right to re-do the work at its own expense, subject to compensating the customer for damages caused by the delay. A contractual limitation of the contractor's liability for defects does not apply in cases where the defects occurred through the contractor's faulty action or inaction. If the contract is terminated for any reason at any time prior to the formal acceptance of the works by the customer, the customer may demand that the contractor transfers to it the results of works performed by that time subject to compensating the contractor for incurred expenses.

The law does not establish a mandatory minimum warranty period (or indeed a general requirement to include a warranty provision) in the context of contractor's contracts. Pursuant to Article 724 of the Civil Code, if the contract does not provide for a warranty period, the customer can make claims related to the quality of performed works if the defects are found within a reasonable period of time, but in no event later than two years following the date of the transfer of the work results to the customer, unless a different time period is provided for by law, by contract or market practice. If the warranty period is less than two years and defects are found after the expiration of the warranty period, but within two years following the date of the transfer of the work results to the customer, the contractor shall be liable if the customer can prove that the defects had occurred prior to such transfer or due to reasons that had occurred prior to such transfer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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