Facts: an agreement was concluded between FSUE “Rosmorport” (hereinafter the claimant, the contractor) and JSC “Khatanga Commercial Seaport” (hereinafter the defendant, the customer) for the icebreaking support of “Yermak” and “Grigory Shelikhov” vessels navigating the Northern Sea Route within the Port of Pevek from 20.11.2019 to 26.11.2019.

The icebreaker “Novorossiysk”, owned by “Rosmorport”, provided unhindered en route passage of “Grigory Shelikhov” on November 20 and from November 21 to 26, and escorted “Yermak” from the November 20 to November 21. The start and end times of each vessel’s icebreaker escort were confirmed by extracts from the vessel’s log showing that these exact operations had been carrying out.

The claimant subsequently provided the defendant with service certificates and invoices totalling over 21 million roubles. The cost of these services was calculated by the claimant on the basis of the amount of time the icebreaker spent on the move and standby – the relevant hourly rates were set out in the contract.

The defendant, having received the claimant’s demand, paid only part of the services for the time “Novorossiysk” was afloat (about 11 million roubles), refusing to pay for the icebreaker’s waiting time (about 10 million roubles).

On 24 December, the claimant sent a claim for the full payment, including a penalty for the breach of the time limit set out in the contract, but the defendant rejected the claim. The latter stated that because there was no definition of “waiting time” in the contract and the rates for this type of service were not regulated by the competent authorities, it believed that the term in question referred to the time spent by the master of the icebreaker in deviating from its course in order to rescue people at sea or to call at the nearest ports for shelter in case of the weather deterioration.

The parties, being unable to resolve the dispute through the amicable settlement, resorted to the court.

The court found in favour of the defendant in full, stating the following. Given the fact that in accordance with the Federal Law dated 17.08.1995 “On Natural Monopolies”, icebreaking service of vessels is the sphere of a natural monopoly, uncertainty in the contract terms shall be construed against the party that offered it, which was Rosmoport. Furthermore, in analysing all of the circumstances, the court could not determine the exact moment when the services were to cease. Without it, it was impossible to calculate the exact waiting time for the icebreaker and to determine whether it had been caused solely by the need to service the vessels of the defendant.

Judicial decisions: on 05.03.2021, the Commercial Court of Krasnoyarsk Krai dismissed the claim in full. On 08.06.2021, the Third Commercial Court of Appeal upheld the lower court’s decision. The Commercial Court of the East Siberian District also dismissed the complaint.

Comment: in the case under comment, the court was confronted with several problems, which will be considered in this review. Firstly, the problem of the interpretation of contractual terms when there is a “strong party” in the relationship; secondly, the subject and the legal nature of the contractual obligation to provide icebreaking services for the vessel.

Interpretation of the contractual terms

The interpretation of the contractual terms is carried out in accordance with the principles, methods and techniques defined by the legislator¹ and in case law. However, there is no common understanding of the “correct interpretation” either in foreign jurisdictions or in Russia. This uncertainty is not only due to the different approaches to the interpretation of contractual terms in different jurisdictions, but also to the nature of interpretation, which depends, among other things, on the number of circumstances surrounding the conclusion of a deal, which cannot be expressed in abstract statutory or judicial formulas². In this context, some authors have noted that interpretation is closely linked to the inner intentions and knowledge of the interpreter. Consequently, the mere question of creating norms of such interpretation is in itself already limiting its will and contributing to the formal resolution of substantive issues³.

Nevertheless, the law seeks to bring order and create a coherent system. As a consequence, principles and rules of interpretation have been created in different legal systems. In the “German system”, for example, interpretation issues are regulated rather narrowly by specifying only two basic principles which seem to contradict each other: the establishment of the actual will of the parties and the interpretation of the contract terms as they would be interpreted by an average reasonable participant in the market⁴. In this context, the problem lies in the relation between will and its expression⁵ in entering into a contract. It is not the intention, motive or inner will of the party itself that is important for the creation of the contractual relationship, but how this will has been expressed, that is, perceived by his potential counterpart (expression of will)⁶. Nevertheless, the interpretation cannot be carried out without taking into account the true will of the party to the obligation. At the same time, the interpreter cannot assess what is not expressed in the objective world – the inner will. Therefore, the German rules of interpretation are based on examining the will of a party to the relationship but with the attention to the true (inner) will of the parties.

By contrast, the “French (Roman law) system” regulates construction issues in considerable detail (see, for example, sections 1156–1164 of the French Civil Code)⁷. Nevertheless, the French Court of Cassation has often noted that the rules of interpretation stated in the Code are only of an advisory nature⁸. Generally, such rules are established in case law. The main purpose of treaty interpretation in French law, like in German law, is to establish the will of the parties to the contractual relationship⁹.

The Model Rules of European Private Law also contain detailed rules on the interpretation of contracts with emphasis on the need to ascertain the will of the parties¹⁰.

Separately, it should be noted that foreign jurisdictions contain rules on clear conditions which do not require special interpretation. In England, for example, the rule of interpretation of clear terms is called the “Golden Rule”, in France the rule of clear and precise terms, and in Germany¹¹ the rule of unambiguity¹². Nevertheless, the main purpose of contract interpretation in all these cases is still to ascertain the will of the parties to the obligation, and literal interpretation only aims at this ascertainment.

The contract terms interpretation rules are also subject to the general principles of legal regulation – the principles of law – and therefore methods of legal interpretation (functional, historical, etc.) may also be applied to them.

After a brief review of how some foreign jurisdictions govern the rules on interpretation, it is necessary to consider how this issue has been handled in Russia and whether the one has been reasonably resolved by the courts of three instances in the case under review.

Art. 431 of the Civil Code of the Russian Federation (hereinafter – CC RF) establishes a hierarchy of rules for the interpretation of a contract¹³ – first, the court must ascertain the content of the contract from its literal words and expressions, and then, in cases of ambiguity, interpret the contract clause in its systematic relationship to the other provisions thereof and, lastly, establish the actual common will of the parties in view of the purpose of the contract (teleological interpretation).

This approach relegates the establishment of the actual will of the parties to a secondary position. This can lead to several disadvantages. For example, in establishing the literal meaning of words and phrases in a contract, a court may ignore the actual will of the parties which is supported by evidence and arguments other than the contract. In addition, the phrase “literal meaning of words and expressions” is not obvious either; without going into a detailed overview of linguistic views, we will only note that language as a phenomenon has the characteristic of ambiguity, the possibility of several meanings of the same words. Moreover, the meanings of words are self-determined by both the speaker and the perceiver, which inevitably entails a multiplicity of “meanings”¹⁴. At the same time, it should be noted that this point of view and related concerns are not dominant in the Russian doctrine.

In Russian case law, despite the presence of the relevant hierarchy (“the sliding principle”), there are also the court decisions in which the interpretation of contract terms has been aimed at establishing the will of a party to a contractual relationship using additional evidence. However, such establishment has taken place only when the literal meaning of the relevant terms has been unclear (see, for example, the Resolution of the Presidium of the Supreme Commercial Court of the Russian Federation dated 1 November 2011 No. 7605/11 in case A41-9469/2010-317/31, the Resolution of the Federal Commercial Court of Moscow District dated 02 February 2011 No. KG-A41/16933-10 in case A41-28669/09)¹⁵.

This problem is partially resolved by the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 49 dated 25 December 2018 “On Certain Issues of Application of General Provisions of the Civil Code of the Russian Federation on the Conclusion and Interpretation of a Contract”. The third paragraph of cl. 43 of the above Resolution establishes additional rules on the interpretation of a contract according to which “the interpretation of a contract shall be carried out in such a way that it does not allow a party to benefit from its illegal and unconscionable conduct (§ 4 of Art. 1 of the CC RF)” and “the interpretation of a contract may not lead to such understanding of a contractual condition which the parties clearly could not have intended”. Thus, the Supreme Court has in some cases permitted to ignore the literal meaning of words and phrases in favour of the general principles of legal regulation and the true and clear will of the parties to the contractual relationship.

Therefore, the following intermediate conclusions can be drawn from a brief analysis of approaches to contract interpretation. Russian law, unlike the foreign jurisdictions, predominantly relies on the literal meaning of the words and phrases in the contract. However, by virtue of the Resolution of the Plenum of the Supreme Court, this approach is not absolute and is limited to the cases when the right is being abused by one of the parties to a contractual relationship and/or where the literal meaning of words and phrases clearly does not correspond to the will of the parties.

The case under review is one example of such an ignoring of the common meaning of the phrase “waiting time”. The judgments of the courts were primarily based on the fact that one of the parties to the legal relationship was a natural monopoly. As such, the claimant could “dictate” the terms of the contract to the defendant (Art. 428 of the CC RF). Furthermore, the Court stated that the ambiguity of the phrases used in the contract was under responsibility of the party who proposed these terms. In this case, it was the claimant. In other words, the principle of interpretation contra proferentem was used. It should be noted that the Commercial Courts did not ascertain the true intention of the parties to the contractual relationship, no evidence were mentioned in the judgments indicating the parties’ understanding of the “waiting time”. On the contrary, the court made a “punitive” award against the monopolist on the basis of the principle of fairness as understood by individual judges rather than on specific legal provisions.

Subject of the icebreaker service contract

Subject and the legal nature of the contract determine the activities of the party to be paid by the counterparty, liability of the parties, allocation of risks and the burden of proof.

In determining the nature of a contract, we will rely on the division of obligations into obligations to exert effort (the obligation to apply a certain kind of action to achieve a result) and obligations to achieve a result¹⁶. This division is a typical for the French legal tradition. Nevertheless, it is also reflected in Russian doctrine, but with a peculiar interpretation¹⁷.

Under the original concept, in obligations to achieve a result, the contractor guarantees to the customer some result of his activity, which can be expressed either in tangible or intangible form. For example, under a contract of work, the contractor is obliged to provide a result of the work; if he fails to do so, he will be liable to the costumer for non-performance.

In turn, in obligations of effort the result is not guaranteed, but the person is obliged to do its best to achieve it. Thus, a typical example of the obligation of effort in French doctrine is the contract of employment, under which the employee is obliged to carry out the activity provided for in the contract but does not guarantee the result thereof and will not be liable for failure to achieve it.

Within the above division, many questions arise concerning the allocation of the burden of proof, liability and others. However, in the context of the case under review it is necessary to dwell on the definition of the activity for which the counterparty pays.

In obligations to achieve a result, the customer pays for a specific result that is defined in the contract. So, for example, if the counterparty to an icebreaker service contract undertakes to guarantee the safe passage of the vessel it services at a particular time, such an obligation would be directed at the result. In such a context, payment under the contract would not be for the activities performed by the contractor, but for the fact that the vessel reached its final destination. The contractor’s related activities, e.g. waiting or switching to guide another vessel, would not be paid separately. In this case, the issue of payment under the contract for such icebreaking service is self-evident: if the vessel has reached its destination, the obligation has been fulfilled and full payment under the contract must be made; if the vessel has not reached its destination, regardless of the circumstances, the obligation has not been fulfilled and the right to claim counterpayment is not ripe.

In an obligation of effort, the customer pays for the actions performed by the contractor. If the contractor under the icebreaking service contract was obliged to perform specific actions but did not guarantee the safe passage of the vessel along the established route (service contract), the failure to achieve the result in such a case will not affect the customer’s obligation to pay for the services, unless it was caused by improper actions of the contractor. Consequently, in this case, payment shall be made for the services actually rendered, including the contractor’s activities directly related to the vessel’s navigation.

In the present case, the subject of the icebreaking service contract was to ensure safe navigation in the waters of the Northern Sea Route by transmitting the information necessary for such provision, conducting icebreaking surveys, laying channels through the ice, forming a group of vessels to follow the icebreaker and other actions. The payment has been set for the time of performance.

In such a case, the contractor’s obligations under the concluded icebreaker service contract were aimed at performing specific actions and not at guaranteeing the safe achievement of the end point. The customer had to pay for those services which had actually been performed. In other words, if no specific services were provided under such a contract, the customer was not liable to pay for them either.

In this context, the court’s position to clarify the meaning of the term “waiting time” and to determine whether such services were provided by the performer is clear. Overall, the court’s decision seems correct despite the lack of an exhaustive justification for the relevant findings in the texts of the judgments, which however is a commonplace in Russian case law. The situation was also complicated by the fact that it had not actually been proved by the performer that the icebreaker was in port solely as a result of the contract with the client.

Possible ways of recovering money in favour of the claimant

However, under certain ways of interpreting the waiting time charge, the court could recover money from the defendant in the appropriate amount.

Thus, the waiting time could have been interpreted by the court as a subscription fee under the contract (Art. 429.4 of the CC RF). In such a case, the defendant would not be paying for the performance of a particular act but for the opportunity to request that it to be performed. Nevertheless, such an interpretation of the relevant clause is directed against the customer’s interests and allocates the risks of the parties differently from the “standard” terms. Since the ambiguity of the terms dictated by a party to a contractual relationship is interpreted against that party, the interpretation of the “waiting time” fee as a subscription fee could not be enforced. The impossibility of interpreting an agreement as a subscriber fee if the relevant conditions are unclear is also set out in cl. 33 of the Resolution No. 49 of the Plenum of the Supreme Court of the Russian Federation “On Certain Issues of Application of General Provisions of the Civil Code of the Russian Federation on the Conclusion and Interpretation of a Contract”.

A different question then arises: would the judgments have been altered by the fact that the contract expressly stated the subscriber fee nature of the contract? Although Russian law gives priority to a literal interpretation of a contract pursuant, Art. 428 and 10 of the CC RF allow a court not to apply contract terms if such terms so restrict the rights of the other party that, given equal bargaining power, this party would not have accepted the terms in question. In many cases, setting out the terms on subscriber fees is a restriction of the customer’s interests since he is forced to pay not for provision of specific services but for the opportunity to demand such services (possibly with a subsequent surcharge for the provision of services in the amount determined by him). Consequently, in relations with monopolists, if such fees are not based on the nature of the relevant contract and it is not obvious to the other party that such a term exists, subscription fees should not be applied.

Icebreaking services for vessels in this context do not explicitly require the counterparty to pay for such services in the form of a subscription fee. Nor did the subject matter of the relevant contractual relationship, as examined by the court, contain such terms. Therefore, the relevant contract could not be construed as a subscription-based one under the circumstances.

Similar reasoning applies to the use of the contractual construct of take-or-pay clause in this case. In accordance with disputed interpretation of the take-or-pay clause by the Supreme Court of the Russian Federation, it is a contractual fee for withdrawal from the contract (Art. 310 of the CC RF)¹⁸. In other words, if a person uses the production facilities reserved for him, he receives performance of the respective obligation and is obliged to pay for such performance, if such a person refuses to use the said facilities, he is obliged to pay for withdrawal from the contract. Without repeating the arguments on the application of Art. 428 of the CC RF and the need for equality of negotiating power in establishing the relevant terms of the contractual relationship. It only should be noted that the said clause must be explicitly expressed in the contract and be obvious to the party which is accepting it.

Therefore, the court was in a position to recover the amounts claimed in favour of the claimant by recognising the “waiting time” clause as a subscription or take-or-pay fee. However, such conditions were not explicitly expressed in the contract. Pursuant to Art. 428 and 431 of the CC RF, the court may not interpret the terms of the contract against the weaker party. If, however, the monopolist wishes to set out the relevant conditions in the contract, it must express such provisions in the text without allowing for the possibility of ambiguous interpretation thereof. Even then, however, there is a possibility that such conditions may not be applied by the court as unfair, dictated by the strong party during negotiations.

Conclusion

The present case is, at first glance, a fairly straightforward dispute over the recovery of contractual debts. However, when analysed, it reveals a number of the problems which have not been solved in the Russian legal order either at the level of legislation or case law or at the doctrine level. The present review does not seek to provide an exhaustive description of the relevant problems and their possible solutions, but it does provide some guidance on the above-mentioned circumstances.

From a practical point of view, market participants should formulate contract terms so as to avoid the possibility of ambiguous interpretation thereof, this is especially important for the strong party in the negotiations; in negotiating and formulating future contract terms, the parties should pay more attention to the issues of economic countervailing (Art. 328 of the Civil Code), the subject and legal nature of the potential contractual relationship. ■