Opportunities and Obstacles of Proactive Contracting for Russian Business

15.08.2013

The most notable obstacles for proactive contracting are rigid law and strict business/contracting practices. In the Russian market, these obstacles are both exceptionally strong. Russian contract law is more rigid than its Western counterparts’, especially compared with Nordic contract law. The reason for this is that Russian academic lawyers, who drafted the Civil Code, seem to regard rigid legal rules as means of protecting contracting parties and courts offering protection.

According to empirical studies, contracts in business are too often seen only as legal documents that have to be concluded in order to enable business to be done. After having been signed, contracts are put into a safe-box in the hope that they will never have to be studied again, since contracts are only read afterward when a legal dispute arises. A good contract is therefore regarded as one which limits one's own liabilities and transfers them to the other party. With this attitude contract negotiations are seen as a competition or a power struggle. However, empirical studies also show that in spite of rigid contract documents, contractual relations can be treated more broadly. Strict contractual clauses are not applied, but problems of keeping to time schedules or contingencies caused by the business environment are tolerated. 

A proactive approach to contracting, however, regards contracts as a hidden source of competitive advantage. Proactive law is a multidisciplinary and practice-oriented approach, which emerged in cooperation with corporate lawyers and academics in the United States (www. preventivelawyer.org) and the Nordic countries (www.proactivelaw.org; www.uef.fi/oikeustieteet/Flexibility; www.uef.fi/oikeustieteet/ccc).A proactive approach sees contracts as a tool for communication between contracting parties alongside the more commonly recognized functions such as safeguarding and control. Contracts should help to prevent problems arising, solving disputes between the parties before they become legal matters and are taken to court. Therefore clearly defined responsibilities, mechanisms of changing management and maintaining trust in the relationship are crucial. Besides the legal aim of binding the parties, proactive law emphasizes the need to support the parties’ business goals of ensuring profitable business for both parties.

The goals of proactive law may sound naïve for businessmen and lawyers, who have adopted the traditional contradictory approach to contracts, or who advocate short-term gains over reliable business relations. Even those who count on trust and loyalty in business relations do not necessarily recognize the opportunities offered by proactive contracting. What are the reasons for not viewing contracts in a proactive way?

The most notable obstacles for proactive contracting are rigid law and strict business/contracting practices. In the Russian market, these obstacles are both exceptionally strong. Russian contract law is more rigid than its Western counterparts’, especially compared with Nordic contract law. The reason for this is that Russian academic lawyers, who drafted the Civil Code, seem to regard rigid legal rules as means of protecting contracting parties and courts offering protection.

Contract law, however, is not the biggest obstacle to proactive contracting, since freedom of contract offers good opportunities for developing one's own more flexible rules and governing contractual relations privately. Mandatory law turns out to be a big obstacle. In interviews foreign businessmen who export or import or do business in Russia complain about rigid legislation. In cross-border trade, contracts are an important means of control for the Russian authorities, since contracts are checked by customs authorities and banks, who must control currency legislation. Contracts are also controlled by the tax authorities. This makes it difficult to use contracts as a means of communication between the parties themselves. They have to write contracts for third parties controlling them. As a result, opportunities for flexibility in contractual relations are limited. Changes such as price reductions due to lower quality or late delivery must be made in writing. Changes practically require a new contract.

Laws and formal rules are not the only obstacles standing in the way of more flexible contracting. Business practices are also rigid. Foreign businessmen who start operating in the Russian markets are often taken aback by the need for written letters, protocols and the bureaucratic order of getting things done in situations where a handshake would be sufficient in their own country. The round stamp is a constant source of amazement to them. Business practices still seem to follow the logic of Soviet authoritarian and bureaucratic practices that were applied at state enterprises.

Both rigid law and rigid business practices reflect a lack of trust. Protection is sought in formal rules and practices, which, however, cannot offer effective protection for the parties. Because of the lack of trust and rigid formal rules and practices, creating and maintaining trust becomes the most valuable aspect of successful business. In this sense, proactive and flexible contracting has an important role to play in Russian markets. The business environment emphasizes the role of relations, which may often contradict the formal written contracts.

In conclusion, it can be said that the formal framework does not support business relations in Russia, but functions more as a constraint for business and increases transaction costs. In such circumstances relations between the parties and trust become more important. This may come as a surprise to foreign businessmen, who are used to quite well functioning formal rules, which are created not only to control, but to support business. When formal rules are not respected, a lot of effort has to be put into relational aspects, which also increases transaction costs. So, proactive contracting is important in Russia, although the means to prevent problems from arising and to guarantee profits for both parties differ to some extent. In Russia the emphasis is on relational contracting capabilities.

The author is the laureate of the Valdai Club Foundation Grant Program .

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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