If a contract contains a take-or-pay clause, the customer’s waiver of the right to services (obligation “to take”) does not itself excuse the payment obligation towards the contractor (obligation “to pay”). Obligation “to pay” is a payment for the termination of a contract (§ 1 of Article 6, § 3 of Article 310 of the Civil Code of the Russian Federation (CC RF)).

Facts of the case: OTEKO-Portservice transhipped the bulk cargo and carried out the investment project for the construction of the Tamanskiy bulk terminal in the seaport of Taman. Kaproben was involved in coal trading.

On February 26, 2019, OTEKO-Portservice (operator) and Kaproben (customer) entered into a contract, pursuant to which in consideration of the agreed payment, the operator guaranteed to the customer to perform from July 1, 2019, to December 31, 2023 a range of works and services for forwarding, transhipment, storage, and accumulation of hard coal, which was to be exported abroad the Russian Federation, as well as to perform other works and services during the transhipment.

Kaproben undertook to deliver coal to the operator for transhipment in the relevant volumes under the take-or-pay clause and to pay the sums due.

There was a condition in the contract for its early termination at the request of one of the parties. In particular, the customer was entitled to terminate the contract only in case of its violation by the operator, namely the failure confirm the shipment of the cargo in the volumes and withing the timeframe agreed in the contract, and also in terms of timely acceptance of the cargo. In these cases, the customer would be relieved from the obligations under the take-or-pay clause.

On September 12, 2019, Kaproben notified OTEKO-Portservice in writing that pursuant to Articles 450.1, 782 of the CC RF they refuse to perform the contract and deem the contract cancelled, and the relationship of the parties’ terminated from the moment of the receipt of the notice of cancellation by OTEKO-Portservice. Kaproben subsequently explained that the cancellation of the contract was due to the unfavourable coal market conditions.

OTEKO-Portservice sent a claim letter to Kaproben stating that the cancellation was unlawful since neither the contract nor the law provided for such a right to avoidance and then filed a claim to the commercial court to hold the unilateral cancellation unlawful.

Claimant’s arguments:

1) Actions of Kaproben are unlawful since the parties did not provide for the unilateral cancellation of the contract. The take-or-pay clause guaranteed that the claimant would receive payment regardless of the avoidance of his services. The money to be received were to be used for the development and maintenance of the port in the interests of Kaproben, who in turn benefited the reservation of the port’s capacities, the guaranteed volume of services, and the long-term fixed price.

2) The parties’ arrangements shall not be ignored and shall be subject to judicial protection; arbitrary and uncompensated cancellation of the contract is inadmissible pursuant to the terms agreed for by the parties.

Defendant’s arguments:

1) The agreement is a contract for the provision of services and shall therefore be governed by Chapter 39 of the CC RF.

2) Paragraph 1 of Article 782 of the CC RF on the customer’s right to cancel the contract without any cause is a mandatory provision, so the right of cancellation cannot be changed agreement of the parties.

Ruling of the courts: The Commercial Court of Moscow in its judgement dated August 18, 2020, satisfied the claim on acknowledging the unilateral cancellation of the contract unlawful. The court deemed the contract to a mixed contract, which did not allow for the application of the norms of Article 782 of the CC RF on the contracts for the provision of services. The court also concluded that Kaproben was not entitled to cancel the contract unilaterally.

The Court of Appeal by its Ruling dated November 3, 2020, which was upheld by the of the Ruling of the Cassation Court dated March 23, 2021, overruled the Judgement dated August 18, 2020, and dismissed the claim on acknowledging the unilateral cancelation of the contract unlawful. The Court of Appeal and the Cassation Court found that the contract in question was a contract governing the relations of the parties arising from the provision of fee-based services and the defendant had validly exercised his right to cancel the contract under § 1 of Article 782 of the CC RF regardless of whether the parties had agreed otherwise.

The courts also pointed out that Russian legislation does not provide for the take-or-pay contract terms and legal effect of thereof. The negative consequences due to the cancellation of the contract, which were incurred by OTEKO-Portservice, could be remedied by the compensation of costs that were actually incurred by the latter, to perform the contract.

The Judicial Chamber on Economic Disputes of the Supreme Court of the Russian Federation upheld the judgements of the Court of Appeal and the Cassation Court, i.e. dismissed the claim on acknowledging the unilateral cancelation of the contract as unlawful. However, the Supreme Court amended the reasoning of the judgements and acknowledged the right of the claimant to receive monetary compensation as payment for the cancellation of the contract.

The legal reasoning of the Supreme Court can be expressed in three main theses:

1) “The main obligation of the OTEKO-Portservice towards Kaproben arising from the contract in question was essentially to transship the coal from the railway wagon to the sea vessels. These legal relations of the parties shall be primarily governed by the provision of Chapter 39 of the CC RF. The provisions of § 1 of Article 782 of the CC RF entitle the customer to cancel the contract unilaterally without any cause. However, the nature of the contract and its terms may establish certain specific features of a party’s right to exercise of the cancellation of the contract…”

2) “Legal relations under the “take-or-pay” clause are not governed directly by the Russian legislation. At the same time, due to freedom of contract principle, Articles 1 and 421 of the CC RF, which set out the rules for interpretation, the lac of the regulation of certain relations in Russian law does not limit the parties’ right to produce various contractual terms beyond the framework set out in the CC RF, and does not give the court grounds to ignore such contractual terms, especially if they concern entrepreneurial activity…”

3) “The customer’s avoidance of the services (obligation “to take”) does not itself excuse his payment obligation in favour of the contractor (obligation “to pay”). Under the “take-or-pay” contract if the customer refuses to accept the specific performance (obligation “to take”), the performance of his obligation “to pay” shall be deemed as a payment for the cancelation of the contract (§ 1 of Article 6, § 3 of Article 310 CC RF”), and calculated from the duration period of the “take-or-pay” clause, agreed upon by the parties”.

Therefore, the Supreme Court has qualified the cargo transhipment at a seaport as services; the Court observed the mandatory nature of the provision of law, which provides for the right to cancel the contract for the provision of services; at the same time, the court emphasized that the courts shall not ignore the parties’ agreements, which are not provided for in the CC RF and which do not contradict to the mandatory provisions of law, and found that the “take-or-pay” contract terms are not contrary to Russian law, and also found the obligation “to pay” to be a payment for the cancelation of contract. All of the theses need to be commented on in order to determine their legal significance, i.e., impact on subsequent practice.

Comment: the contractual dispute arose from the activities at a seaport, so the case was submitted to the judicial practice review published in Maritime Law Journal. However, the issue is of a general nature and has no maritime specifics. The “take-or-pay” clause is widespread in Russian practice, so the commentary is relevant to all participants of civil commerce, both those involved in merchant shipping and those in other areas. The commentary is based on answers to questions that arose in connection with the “take-or-pay” clause, but before that, there are two remarks regarding the legal interpretation of the transhipment agreement and freedom of contract.

1) Cargo transhipment agreement as a type of services and the customer’s right to avoid the contract.

As regards the legal interpretation of the transhipment agreement¹ under the CC RF, the are ongoing disputes in judicial practice, whose practical importance comes down to finding the answers to two questions: 1) what does the customer pay for: for the result or for compliance of the contractor’s actions with the behaviour model? 2) is the customer entitled to unilateral cancelation of the contract?

Some courts support the position that the transhipment agreement is a mixed contract which contains elements of different contracts (§ 3 of Article 421 of the CC RF) and, when resolving the disputes over payment and the customer’s right to cancel the contract, one shall rely on the parties’ agreements rather than look for an answer in the Code. In the commented disputed, the Court of first instance took this position, which gave the grounds to hold the unilateral cancellation of the contract unlawful since the parties had excluded that right of the customer.

Another opinion, which can also be found in judicial practice, is that a transhipment agreement is contract for works, which means that the customer shall pay only for the result. Pursuant to Article 717 of the CC RF, the customer is entitled to avoid the contract, but he has to compensate the contractor for losses and pay for the part of the work performed.

The third position is that the transhipment agreement is a type of a contract for the provision of services. This legal reasoning conforms to the Federal law “On the Seaports in the Russian Federation” dated November 8, 2007, No. 261-FZ, which stipulated directly in Article 20 that the transhipment is a service. The practical meaning of interpretation of the transhipment agreement as a type of services comes down to the fact that the customer pays, not for the result, but for the compliance of contractor’s actions with a behaviour model accepted in commerce (§ 1 of Article 779 of the CC RF). This also it actualises the problem of the customer’s right to cancel the contract without compensating the contractor’s losses. A reasonable approach is expressed in paragraph 4 of the Ruling of the Plenum of the Supreme Commercial Court of the Russian Federation dated March 14, 2014, No. 16 “On Freedom of Contract and Its Limits”, which states that the customer’s right to avoid the contract is of a non-mandatory nature. In other words, it was accepted that the parties are entitled to exclude by agreement the possibility of unilateral cancellation of the contract for the provision of services. However, the subsequent judicial practice has not taken this approach and continued to regard the customer’s right to unilateral cancellation of the contract as a mandatory provision of § 1 of Article 782 of the CC RF that cannot be excluded an agreement. The case under review is a vivid example of the interpretation of a transhipment agreement as a contract for the provision of services with the mandatory right to unilateral cancelation of the contract since the Supreme Court upheld the relevant conclusions of the courts. Although there is no rule that the Rulings of the judicial chambers of the Supreme Court are of a generally binding nature, their Rulings serve as a guideline for judicial practice. It means that for some time the legal reasoning that the transhipment agreement is a type of contract for the provision of services with the mandatory right to cancel the contract will prevail in judicial practice.

From the theoretical point of view, the problem of the mandatory nature of the customer’s right to cancel a contract for the provision of services is contentious. On the one hand, it does not seem logical to impose services on the customer (for example, one might have asked for design services, that’s it, there is no step back, one has to bear them, one cannot avoid the contract if the services were rendered properly), so it would be good to have a mechanism to avoid the contract. On the other hand, the contractor shall not only have protection in the form of compensation for actual losses incurred. Looking ahead, the solution proposed by the Supreme Court is dogmatically flawed, but it really offers such mechanism: the mandatory customer’s right to avoid the contract but for a possible pre-agreed payment to the contractor (liquidated damages).

2) The legal force of contractual terms which are not provided for in the CC RF.

An important legal reasoning for the further development of practice is the positive assessment of the agreement not provided for in the CC RF by the Supreme Court. Parties to contractual relations often use terms which are not provided for by the Russian civil legislation and there is always apprehension whether the Russian courts will find a contractual term to be invalid because it is not provided for in the CC RF. It is because of this apprehension the provisions for indemnity, representations, corporate contracts, and even elective and alternative obligations were included into the Code in course of its reform. There was the risk of invalidation of “the take-or-pay” clause in the present case: the Court of Appeal and the Cassation Court acknowledged this clause to be invalid as a clause not provided for by the CC RF. However, the Supreme Court did not support this position and made the exact opposite assessment: the clause has legal force even though it is not provided for in the Code. This is a good signal to the courts that the parties’ agreements shall not be considered invalid only because the relevant contractual terms are not provided for in Russian legislation. Further, we will analyse the content of the “take-or-pay” clause and the practical significance of the Supreme Court’s interpretation of the obligation “to pay” as payment for the termination of the contract.

3) What is a take-or-pay clause?

This clause originated in international trade and its nature is that one party is entitled to choose the content of the performance of its obligation: either to accept the goods, works, or services or to refuse acceptance but to compensate the counterparty as if the goods, works, or services have been accepted. This clause can be included into any contract, in a sale of goods, contract for works, contract for the provision of services, as well as any agency contracts. In Russian practice, this clause is widespread in oil and gas transportation. For example, parties enter into a framework contract to transport oil or gas at the customer’s request. Assuming the customer files a request but provides less gas or oil or does not provide it timely. In such a case, pursuant to the “take-or-pay” clause, the customer, who has not provided oil or gas, is obliged to pay as if the services had been rendered². In either case, details of the clause are provided for by the parties’ arrangements.

In present case, the parties agreed the “take-or-pay” clause to mean that the customer’s obligation to deliver a guaranteed volume of coal to the bulk terminal (the commercial seaport Taman) with the corresponding customer’s obligation to pay the costs of transhipment of non-delivered volume of the coal at the rates of transhipment agreed upon in the contract. In the case of non-delivery of the coal, the customer is still obliged to pay for the services (which have not actually been rendered, but the capacity for its rendering has been reserved).

It is noteworthy that the “take-or-pay” clause does not terminate the contract, but only entitles the customer to choose whether to make use of the services or to pay for being aware that the contractor has reserved the capacity.

This clause is often used in the so-called framework contracts or in subscription contracts. A framework contract (Article 429.1 of the CC RF) defines the general terms of the parties’ relations, but these terms are specified in separate contracts usually through requests which contain the period and scope of the services to be rendered. The “take-or-pay” clause allows the customer, who submitted the request, not to make use of the services, and the contractor is protected because he will receive payment. A subscription contract (Article 429.4 of the CC RF) implies periodic payments to the contractor, and the customer makes use of the services at his own discretion. The subscription contract is not a “take-or-pay” contract, but there is a common feature: the customer may not make use of the services, but he is obliged to make regular payments. For example, this is a contract pursuant to which we make use of the internet providers’ services. Both the framework and subscription contracts are not terminated by the performance of the obligation “to pay”.

The Supreme Court defined the “take-or-pay” clause closely to the way it is usually defined in the contracts by the parties: “the legal nature of the “take-or-pay” clause included by the parties in the contract consists of two separate but closely related obligations. The first obligation (“to take”) implies the customer’s (buyer’s) right to make use of certain extent of specific performance from the other party (contractor, supplier) for the certain period of time, while the other party has a corresponding obligation to provide that performance”.

However, then the Supreme Court, in contrast to the possible intention of the parties, deemed the performance of obligation “to pay” as a payment for the cancellation of the contract: “under the “take-or-pay” contract, if the customer refuses to make use of the specific performance (obligation “to take”), the performance of its obligation “to pay” may be regarded as a payment for the cancellation of the contract (paragraph 1 of Article 6, paragraph 3 of Article 310 CC RF)...” This conclusion can be valid for this specific case due to the fact that the customer had cancelled the contract, but this conclusion cannot be taken as a general legal reasoning for all similar cases. In many other situations where the customer does not cancel the contract and merely does not deliver the goods for transhipment, the obligation “to pay” normally implies that the contract remains in force.

4) What is a payment for the cancellation of a contract?

Payment for the cancellation of a contract was introduced into Russian commerce through the freedom-of-contract principle – the right of the parties to formulate contractual terms which are not provided for by the CC RF (§ 1, 4 of Article 421 of the CC RF). In course of the CC RF reform, to eliminate hesitations of the courts as to whether this clause is of a lawful nature, the payment for the avoidance of the contract was implemented into § 3 of Article 310 of the CC RF. As A. Karapetov rightly points out, “such a payment is intended to compensate the inconvenience to the counterparty related to undergoing an arbitrary choice by the entitled party in favour of cancellation of the obligation...”³ In other words, the payment for the cancellation of the contract is the compensation for such cancellation agreed upon by the parties.

Paragraph 1 of Article 782 of the CC RF, which provides for the unilateral cancellation of the contract for the provision of services by the customer, provides the obligation of the customer who cancels the contract to compensate the contractor’s expenses, which were actually incurred, to render the services. However, it is a matter of discussion whether the salaries of the employees shall be included in these expenses. Many courts take the position that an employee’s salary is paid under the labour law and does not depend on the services rendered by the employer or the third party, so the latter are not actual expenses incurred by the contractor to render the services. The result of this position is that the contractor is not protected. At any time prior to acceptance of the performance, the customer is entitled to cancel the contract, and no monetary compensation will be paid to the contractor.

Given the courts’ conclusion that the customer’s right to cancel the contract is mandatory, the issue arises in regard to the mandatory nature of the provision of compensation to the contractor for the expenses actually incurred. Is this a mandatory or a non-mandatory provision? In the present case, the Supreme Court essentially held that the provision on compensation to the contractor only for the expenses actually incurred has a non-mandatory nature since the Supreme Court upheld the legal force of the agreed payment for the non-use of services. One may accuse the Supreme Court of inconsistency and wonder why the same paragraph of Article 782 of the CC RF is partly mandatory (in respect of the right to cancel the contract) and partly non-mandatory (in respect of the right to agree the payment for non-use of the service), or one may be happy about the proposed contractual mechanism of the contractor’s protection and move on.

5) What is the correlation between payment for the cancelation of the contract and the take-or-pay clause?

Payment for the cancelation is a form of settlement between the parties on the termination stage of an obligation. It is a kind of final settlement so that the contract is beneficial to both parties. At a first sight, there are similarities between the obligation “to pay” in the “take-or-pay” contract and the payment for the cancelation – in both cases, the party that declined the services of the counterparty pays to the latter. However, this is the only similarity. Payment for the cancelation is the payment to withdraw from the contract, whereas the obligation “to pay” in the “take-or-pay” contract is not a payment for the cancelation of the contract but the normal course of the contractual relations which are not terminated by the payment.

The practical significance of this distinction is primarily evident in the answer to the question: is it possible to reduce the payment for the cancelation of the contract and the payment in the “take-or-pay” contract?

6) Is it possible to reduce the payment for the cancelation of the contract and the payment in the take-or-pay contract under the provisions on reduction of a penalty?

Strictly speaking, neither the payment for the cancelation of the contract nor the obligation “to pay” under the “take or pay” contract is a sanction for non-performance. In other words, it is not a penalty and therefore the possibility of a reduction is highly questionable from the theoretical point of view.

Nevertheless, paragraph 16 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated November 22, 2016, No. 54 “On Certain Issues of Application of General Provisions of the Civil Code of the Russian Federation on Obligations and their Performance” stipulates the position that the payment for the cancelation of the contract may be reduced on the basis of the good faith principle in exceptional cases where the payment is clearly disproportionate to the unfavourable consequences of the cancelation of the contract, primarily to the losses: “If it is proved that such a monetary sum is evidently disproportionate to the unfavourable consequences caused by the refusal to perform the obligation or the change of its terms, as well as if the willful and bad faith nature of the exercise of the right to claim the payment of this sum is proved, then in this exceptional case the court may dismiss the recovery of the sum in full or in part (§ 2 of Article 10 of the CC RF)”.

When the Supreme Court deemed the obligation “to pay” under the “take-or-pay” contract as the payment for the cancelation of the contract, the Court simultaneously allowed this payment to be reduced when it was obviously inadequate to the unfavourable consequences caused by the cancelation of the contract. This is perhaps the culmination of the legal problems resolved in this case.

At the same time, it should be recognised that the possibility of reducing payment in the “take-or-pay” contract is not new for the Russian courts since there have been previous disputes where courts have reduced these payments on the basis of Article 333 of the CC RF.

However, there was no legal reasoning of the Supreme Court in regard to this issue. Now there is a strong empirical argument in favour of reduction: if the Supreme Court has named it as a payment for the cancelation of the contract, it means that the payment can be reduced in exceptional cases where there is evidence of disproportionality submitted by the defendant.

7) What is the meaning of the claim to hold the unilateral cancelation of the contract unlawful?

This case demonstrates yet another one of the longstanding problems of Russian judicial practice – the multiplication of legal actions and filing the claims which do not per se protect the right of the claimant because it is usually unclear whether the rights are protected when there is no adjudgment in favour of the claimant.

In this case, the customer’s cancelation of the contract was found valid, and the “take-or-pay” clause was also found valid. This means that the customer owes the contractor a certain payment. Why did the contractor file a claim to hold the cancelation of the contract unlawful and not a claim for recovery of money? Did the claimant wish to save on the court fee or pursue some other goals?

A feature of the modern Russian judicial practice is the multiplication of legal actions – one legal relation is often split into several lawsuits and the courts do not discourage this. Internation practice is different, in many countries the prevailing principle is one legal relation – one legal action. This principle is called res judicata (literally, the dispute resolved)⁴, but in the Russian procedural codes, it is scarcely expressed. Russian court terminates the proceedings if the claim which has been accepted for consideration, is identical in terms of the subject matter, grounds and parties to the dispute to the one which has already been resolved (Article 152 of the Commercial Procedure Code, Article 220 of the Civil Procedure Code). In other words, Russian legal action is individualised and not based on legal relations in the dispute but based on the subject matter and grounds for the claim. As a result, the judicial system is overloaded and disputes from one legal relation are heard several times. This dispute is a vivid illustration of the problem. The claimant should have combined the claim to hold the cancelation of the contract unlawful with the claim for payment under the contract. Otherwise, the Russian court system will face another dispute between the same parties from the same disputed contract.

Conclusion

The main point of this case is the fact that the Supreme Court has found the payment for the cancelation of the contract as an obligation “to pay” under the “take-or-pay” contract. This position shall not be universal since in other disputes the will of the parties might be to retain and not to terminate the contract. In other words, despite the many interesting legal arguments expressed in this case, it is advisable not to give it universal significance in the assessment of the obligation “to pay” as the payment for the cancelation of the contract. ■

Notes