Overview of Agency Law of Russia

Agency Law of Russian Federation - FAQs

STA continues to be in the vanguard of trade and commerce across national boundaries. As we continue to advise clients on matters of franchise and agency law within the Russian marketplace, in this issue we take a close look at the Russian law provisions relating to agency.

Generally speaking, the law of agency deals with situations where one person enters into the legal relationship with another person by acting not personally but through an intermediary. Agency law is important since it gives the possibility of entering into business transactions when due to various circumstances a person is unable to participate personally. Agency law also provides a fierce market for competitive business practices which allows expansion without the physical presence in turn allowing ideas to flourish. It is therefore rightly said that a possibility to participate in business transactions through an agent is a guarantee for implementing the right of a person to freedom and initiative of business activity. Talking of the investments by state players wide the Russian Direct Invest Fund or indirect investment by smaller players- the underlying fact remains that the interests in Russian Economy from the Middle East investors are on the rise. Earlier the trade between countries was restricted to outward investments in oil, a trend which is seemingly evolving.

 What is the law governing agency relationships in Russian Federation?

 The Russian Federation Civil Code (the Civil Code) regulates and governs the appointment of agents in Russia. In addition, commercial agency services are regulated by means of international agreements and/or conventions, namely:

1. Hague Convention 1978 on the Law applicable to the agency;
2. Rome Convention 1980 on the law applicable to contractual obligations;
3. Geneva Convention of 1983 on International Sale of Goods;
4. Types of Commercial Contracts of International Chamber of Commerce (ICC) (Publication No.496);
5. Guide on Compilation of Commercial Agency Contracts (ICC Publication number 410); and
6. ICC Commentary on Commercial Agency Contracts (ICC Publication number 512). 

How is the agency relationship defined under Civil Code?

Pursuant to Article 1005 of the Civil Code ‘under an agency agreement [when one person (the agent) in the name of another person (the principal)] for remuneration takes legal or other actions in his own name, but at the expense of the principal, or in the name and at the expense of the principal

 Article 1007 of the Code has provided that a principal and an agent may include an exclusivity provision which would refrain the principal from executing similar agency agreements with different agents in the same territory. The concept of exclusivity has the substantial connection with the territory in which the agency agreement would be executed. A principal would be refrained from making similar agreements with other agents in the territory defined in the agency agreement as long as an exclusivity provision exists in the agency agreement.

 The agency effectively comprises two types of relationships:

1. When the agent performs actions in his own name, but at the expense of the principal; and
2. When the agent performs actions in the name and at the expense of the principal.

 A commercial agent is a person who has a direct authority to act on behalf of the principal. A commercial agent can not only conclude transactions or sales of foreign goods but also conduct an advertising campaign at the same time.

A principal is a person who gives a commercial agent authorization to perform legal and other actions on his own behalf or on behalf of the principal.

 What is the scope of authority that can be delegated to an agent? How does then the agent bind the principal by his acts?

 The principal should provide the agent with lawful, practicable and concrete instructions about how he should execute the subject matter of the agency agreement. Occasionally, situations arise where the agent faces a dilemma in executing the instructions that were conveyed to him. Item 2 of article 973 of the Code has provided agents the authority to deviate from the principal’s instructions if it is necessary under the prevailing circumstances and it is in the interest of the principal. However, the agent should have been in a situation where he was unable to obtain the principal’s permission for the deviation from the principal’s instruction. The agent is also obliged to communicate the details of the deviation to the principal at the earliest period.

 If the agent entered into a transaction with a third party on his behalf and at the expense of the principal, the agent will be liable to the third party, even if the principal was named in the transaction or entered into with a third party in a direct relationship to execute the transaction. However, in a transaction made by the agent with a third party on behalf of and at the expense of the principal, the rights and duties arise directly with the principal (Article 1005 (1) of the Civil Code).

 What if the agent exceeds the authority granted under the agency agreement?

 As per Article 183 of the Civil Code, if the agent exceeded the power granted to him and enters into a specific transaction, such a transaction will be considered as concluded by the agent not by the principal, unless the principal approves such a transaction.

 Okay, are there any formalities to follow for appointing an agent?

No. There are no formalities as such under the Civil Code for the principal to comply with when appointing an agent. The agency relationship may be established either by a written contract or an oral agreement. However, commercial agency contracts on foreign trade transactions must be concluded in writing.  In addition, to the agency agreement, the principal may also issue a power of attorney (POA) to the agent, empowering him to act on behalf of the principal.

What types of agency relationship do exist or are recognized within the Russian Federation?

• A simple agency agreement – is an agreement by which the principal has the right to sell goods via several sales agents in Russia.
• An agency agreement with the exclusive right of sale – is an agreement by which the principal is obliged to sell the goods only through the commercial agent appointed and is not be able to offer the same product to other commercial agents during the term of this agreement.
• An agency agreement with a preferential right to sell – is an agreement by which the principal is obliged to offer the goods in the first place to the agent and if the agent refuses to accept the goods, the principal has the right to offer it to other commercial agents. 

Okay, what are the agent’s duty under Civil Code?

According to article 974 of the Code, an agent shall have the duty to:

1. personally perform the duties assigned to him under the agency agreement;
2. communicate information regarding the progress of the execution of the agency agreement at the principal’s request;
3. convey to the principal, all information regarding the items which have been received in pursuance of the execution of the agency;
4. return the power of attorney which is valid even after the execution of the agency.

What are the obligations of the principal?

 Article 975 of the Code states the following as the duties of a principal:

1. to furnish the agent with a power of attorney for the performance of legal actions;
2. to compensate the agent for his expenses;
3. to provide the agent with the means required for the execution of the agency;
4. to accept the performance of the agency; and
5. to remunerate the agent.

How is the remuneration or consideration decided or agreed?

The amount and details of payment of the agent’s remuneration depend on how the parties have agreed to the agency agreement. If the agency agreement does not provide for payment mechanism, the remuneration shall be equivalent to such type of services in comparable circumstances (Article 424 (3) of the Civil Code).

Are there any restrictions on not to compete with the agency agreement?

 As per Article 1007 of the Civil Code, an agency agreement may provide for restrictions on the part of both the principal and agent. The agency agreement can impose an obligation on the principal not to conclude similar agency agreements with other agents acting on the territory defined in the agreement; or to refrain from the independent activity on this territory, which is analogous to the activity which is the basis of the agency agreement.

The agency agreement may provide for an obligation of the agent not to make with other principals analogous agency agreements that must be performed on a territory coinciding in full or in part with the territory indicated in the agency agreement. It must, however, be noted that restriction on competition shall not affect customers. The principal is not allowed to restrict the agent in selling goods or rendering services for an exclusively definite category of customers or exclusively for buyers, who have their place of residence in the territory defined by the contract. Such terms and conditions under the agency contract will be void (Article 1007 (3) of the Civil Code).

 Can the above restrictions apply once the agency agreement is terminated?

The Civil Code does not provide for a continuation of the restrictions after the agency agreement has expired or sooner terminated. However, the parties to an agency agreement can set out some restrictions on competition for a certain period after the expiry of the agreement.

But what if the agent registers the trademark of the principal in Russia and/or counterfeiting the goods of the principal without disclosing the same to the principal?

The Civil Code stipulates that the rights holder shall have the exclusive right to use its registered trademark for ‘goods, labels and packaging which are manufactured, offered for sale, sold, displayed at exhibitions and fairs or used commercially in Russia, or stored and transported or imported into Russia for this purpose; while performing jobs and providing services on documents introducing the goods in commerce’.

So any unauthorized use of a protected trademark is considered infringing. Also, goods, labels, and packaging on which the trademark is unlawfully placed will be regarded as counterfeit.

What remedies the principal has under Russian laws?

Four types of legal action may be taken against trademark infringers and/or agents infringing the trademarks.

• Administrative proceedings

  The illegal use of a trademark entails administrative penalties, which are seizure of counterfeit goods and a fine as follows:

  ·        For individuals – twice the cost of the counterfeit goods, but no less than Rb10, 000;

  ·        For legal entities – five times the cost of the counterfeit goods, but no less than Rb100, 000; and

  ·        For officers – triple the cost of the counterfeit goods, but no less than Rb50, 000.

• Civil proceedings

  The principal may claim the following civil remedies in civil claims:

  ·        cessation of the authorized use of the trademark;

  ·        Reimbursement of damages;

  ·        removal of all counterfeit goods from the market and their destruction;

  ·        compensation instead of damages between Rb10, 000 and Rb5 million.

  Preliminary injunctions are available. The court may order injunctive relief preventing the agent from performing actions related to the subject matter of the proceedings or ordering the seizure of his property.

• Criminal proceedings

  The principal can bring the criminal case, but only if the infringement occurs repeatedly or if the damage exceeds Rb250, 000. Criminal penalties include:

  ·        a fine of Rb100,000 to Rb300,000 or up to two years’ salary or other income of the convicted person;

  ·        compulsory community service for up to 480 hours;

  ·        corrective or disciplinary work for up to two years; and

  ·        imprisonment for up to two years with a fine of up to Rb80, 000 or up to six months’ salary or other income of the convicted person.

Note that the principal may the reimbursement of damages from the agent. It may initiate the civil claim within the ambit of criminal proceedings.

 So, how about terms and termination of the agency agreement?  

An agency agreement can be entered into for either a defined term or indefinitely (Article 1005 (3) of the Civil Code). Therefore, the parties are free to decide on the term of the agreement. In practice, agency agreements are often concluded for an indefinite period and the parties have the right to unilaterally terminate the agreement.

A notice period for termination of the agency shall not be less than 30 calendar days (Article 977 (3) and Article 1004 (1) of the Civil Code).

Now, once the agency is terminated, will the agent have any right to compensation or indemnity?  

No. Russian law does not set out any compensation or indemnity upon termination of an agency agreement.