Practical Guide to International Commercial Agency Contracts in Russia

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Russia

How are agency agreements regulated in Russia?

In Russia, commercial agency agreements are regulated by chapter 52 (articles 1005 to 1011) of the Civil Code of Russia. It is important to note that agency agreements may contain elements related to the engagement (mandate) agreement, where the agent is acting on behalf of the principal, or to the commission agreement, where the agent is acting on its own behalf. In both cases, the agent is acting at the expense of the principal independent of the fact on whose behalf the transactions are being concluded by the agent.

Article 1011 of the Civil Code expressly stipulates that in regard to relations arising from agency agreement the respective rules specified by chapter 49 (mandate agreement) and chapter 51 (commission agreement) of the Civil Code shall be applied depending on whether the agent is acting under the terms of the agreement on behalf of the principal or on its own behalf unless such rules contradict the essence of the agency agreement.

Thus, by drafting (reviewing) the agency agreement the respective chapters of the Civil Code related to mandate and/or commission agreement shall be additionally considered.

There are separate laws in Russia that regulate specific agency relations, for example, agency service for ships (Merchant Marine Code); travel agents (Federal law “On touristic activities in the Russian Federation”).

What are the differences from other intermediaries?

Under the agency agreement one party (agent) undertakes for remuneration to perform on the instruction of the other party (principal) legal and other actions on its own behalf but at the expense of the principal or on behalf and at the expense of the principal.

In transactions concluded by the agent on its own behalf and at the expense of the principal with a third party the agent acquires rights and incurs obligations even in cases when the principal is named in such transaction or entered into direct relations with the third party on the execution of the transaction.
In transactions concluded by the agent on behalf and at the expense of the principal with a third party the principal itself acquires rights and incurs obligations.

The key difference of the agency agreement from mandate and commission agreement is that in addition to execution of legal actions (ex. conclusions of transactions, filing of applications etc.) on the instruction of the principal the agent also performs other actions (ex. research, promotional activities, preparation and conducting of negotiations etc.).

In practice, it is important to distinguish agency agreement not only from mandate agreement and commission agreement but also from service agreements. This differentiation might become essential for tax purposes. You can find some practical examples in the last section below.

An agent is an independent contractor, and this feature distinguishes agents from employees entrusted with the promotion of sales in a particular area on behalf of the employer.

Distributors and agents are also different. Distributors typically buy and resell a principal’s products or services in their own name and behalf and at their own expense in a specified area or country, while agents procure sales contracts which are then concluded by the agent on behalf of the principal or on behalf of the agent, but always at the expense of the principal. Promotional and collaboration duties may be, however, quite similar.

It is worth noting that distribution agreements in Russia are not governed by law, and courts often construe distribution agreements as supply contracts with elements of agency agreements.

Some other features of the agency agreements are the following: 


The agency agreement may specify an obligation of the principal not to conclude similar agency agreements with other agents acting in the territory defined by the agreement or refrain from similar activities in such territory.
The agency agreement may also specify obligation of the agent not to conclude with other principals similar agency agreements that shall be performed at the same territory as agreed in the agency agreement.

Please note that the terms of the agency agreement that stipulate that the agent shall be entitled to sell goods, execute works or render services exclusively for a specific category of buyers (customers) or exclusively to buyers (customers) located or living in the territory determined by the contract are null and void.

How to appoint an agent in Russia

There are no specific rules on appointment of the agent and/or formation of agency agreement stipulated by chapter 52 of the Civil Code that regulates agency agreements, therefore the general provisions on formation of contracts will be applied. Any transactions of legal entities and individual entrepreneurs shall be concluded in written form.

The contract in written form can be concluded by drawing up one document signed by the parties as well as by an exchange of letters and other documents including documents sent in electronic form, and this under the condition that such channels of communication allow determining that the documents are sent by the party of the contract.

The written form is also deemed complied with if the written offer to conclude a contract is accepted in the order stipulated for offer and acceptance.

Note that failure to comply with the written form deprives the party, in case of disputes, of the possibility to refer to statements of witnesses to confirm the transaction and its terms, but does not deprive the party of providing written and other evidence (e.g. email exchange, issued invoices etc.). Non-compliance with the written form of the agency agreement does not render such contract null and void.

The agent might require a power of attorney to fulfil its obligations under the agency agreement. The powers of the agent to act on behalf of the principal might be stipulated in the agency agreement, however, if the agency agreement is not concluded in writing an additional power of attorney is required. In such cases, the powers of the agent to conclude transactions on behalf of the principal and the existence of agency relations can be confirmed by the power of attorney.
Article 1005 (2) of the Civil Code stipulates that if the agency agreement concluded in written form sets forth general powers of the agent to conclude transactions on behalf of the principal, the latter cannot refer to the absence of powers of the agent in relations with third parties unless the principal can prove that the third party knew or should have known about the limitations of the powers of the agent.

The parties are free to provide in the contract that the powers of the agent must be confirmed besides the contract by the power of attorney. In this case, without the relevant power of attorney, the agent cannot perform any legal or other activities on behalf of the principal.

The agency agreement may also provide that the person authorized by the agent to carry out the activities under the agency agreement shall also be granted power of attorney.

Is it possible to apply a foreign law?

Under Russian law, the parties of the contract are free to agree on the law applicable to their rights and obligations under the contract. The parties' agreement on the choice of applicable law must be expressly agreed or must be determined according to the terms of the contract or all the circumstances of the case. The parties are also free to agree on the choice of applicable law after the conclusion of the contract. It is further possible to agree on the choice of applicable law applied to the contract in its entirety or to certain parts of the contract.

Where no choice of law is made, the law of the country in which at the time of conclusion of the contract the place where the party performing the contract is situated will apply, given that the latter is essential to the content of the contract. In the agency agreement, the agent is recognized as the party which executes the contract that has essential meaning for the content of the contract, i.e. in the absence of agreement between the parties, the agency agreement shall be governed by the law of the country of the agent.

Is it possible to submit any disputes to a foreign jurisdiction or to foreign arbitrators?

It is possible that any disputes arising from an international agency agreement be submitted to the jurisdiction of foreign judicial courts or foreign arbitrators. This can be obtained by means of an agreement on jurisdiction or arbitration.

The general rule related to the competence of Russian state commercial courts in international agreements is the following: if the parties, where at least one of the parties is a foreign person, concluded an agreement in which they determined that the arbitration (commercial) court in the Russian Federation shall be competent to consider the present or future dispute connected with performance by them of commercial or other economic activity, the commercial court in Russia will be exclusively competent to consider this dispute under condition that such agreement does not change the exclusive competence of the foreign court.

The general rule related to the competence of International Commercial Arbitration in international agreements is the following: the parties may resolve their disputes by International Commercial Arbitration if the dispute results from contractual and other civil law relationships arising in the course of foreign trade and other forms of international economic relations, including disputes involving individuals, provided that the place of business of at least one of the parties is situated abroad or any place where the significant part of obligations arising out of relationships between the parties is to be performed, or the place with which the subject matter of the dispute is most closely connected is located abroad, and also disputes relating to foreign investments in the territory of the Russian Federation or Russian investments abroad.

Please be aware that on 29 March 2019 new amendments to the federal law “On arbitration in the Russian Federation” entered into force. This law governs the establishment and operation of arbitration courts and permanently acting arbitration institutions (PAAI) in Russia and applies to the resolution of both international and local disputes through arbitration in Russia.

If you agree in international contracts that the seat of arbitration is in Russia, it would be reasonable to choose an arbitration center included in the list of PAAIs in Russia and authorized to resolve international disputes in Russia. Currently, there are two foreign arbitration institutions included in the list of PAAI, namely the Hong Kong International Arbitration Centre and the Vienna International Arbitration Center.

Therefore, if a foreign principal wishes to submit all disputes with a foreign agent to foreign courts/international arbitration, a proper choice of court/arbitration clause should be included in the agency agreement (taking into account any mandatory rules existing in the agent’s country).
The effectiveness of a choice of court/arbitration clause is often to be evaluated in connection with the possibility to have the court judgment recognized and enforced in another country, which is the subject matter of the next paragraph.

Agency agreement termination

Article 1010 of the Civil Code of Russia sets forth the following possibilities of termination of an agency agreement.

The agency agreement can be terminated due to:

  • refusal to execute agency agreement by any of the parties if such agreement does not specify the period of its validity;
  • death of the agent, recognition of the agent as incapacitated, partially incapacitated or declared missing;
  • declaration of insolvency (bankruptcy) of the individual entrepreneur agent.

The court practice in Russia shows that article 1010 does not limit the right of the parties to unilaterally terminate the contract in accordance with the terms agreed by the parties in the agency agreement, i.e. the agency agreement concluded for a specific term can specify grounds for its unilateral termination by either of the parties. Automatic renewal for further periods may apply only if expressly so agreed.

If an agency agreement has no limited term, either party may terminate it unilaterally at any time without cause by sending a notice to the other party. There is no specific regulation on notice terms, therefore it is advisable to agree on such notice terms in the agency agreement.

Termination for breach is also available, e.g.: in case of a substantial breach. The breach is deemed to be substantial if it causes the other party such a loss as to deprive it substantially of what that party could legitimately have relied on when entering into the agreement.

The demand on termination of contract can be filed with the court only upon receipt of refusal by the other party to terminate the contract or non-receipt of the answer within the terms specified in the offer on termination or specified by law or contract, and in the absence of such terms – in 30 days.

Termination indemnity

The Russian law does not specifically regulate termination indemnity due to the agent in case of unilateral termination of contract or its expiry, with that the parties are free to introduce such clauses in the agreement.

Other peculiarities

There are many other important legal aspects to consider when appointing an agent in Russia. Only a few of them are mentioned here below.

The international companies often use agency agreements in Russia for the sole purpose of financing of its subsidiary. In this case remuneration to the subsidiary is often paid by the foreign principal on a “cost-plus” basis, i.e. all costs incurred by the subsidiary (salary, travel, accounting etc.) are reimbursed by the principal and additionally the agent receives small remuneration (usually 3-5% calculated from total costs) to show profits. The major risks in this model are that VAT and profit tax might be calculated by the agent from such remuneration only rather than from the total amount of funds received from the principal. As a result, such agency agreements might lead to negative tax consequences.

Therefore, if the agency agreement is concluded with the affiliated company in Russia it is important to check possible tax risks. Additionally, the transfer pricing regulations in Russia between affiliated companies should be carefully considered.

If the parties intend to transfer goods from a foreign company (principal) to a Russian company (agent) the distributorship agreement rather than agency agreement should be considered since by importation of goods customs and tax regulations in Russia are more favourable for the distributor.