How we helped the client the in assessing the risks of agreement termination

Our client is an industrial equipment manufacturer who signed an agreement to supply parts for final use at one of the nuclear power plants. 

During the manufacturing process, the client realized that supplying some of the parts for him would not be profitable. So he considered the following option: supply some of the parts while refusing to supply the unprofitable part of the items. However, first and foremost, the client decided to consider the risks. 

After analyzing the agreement's text, we discovered that it did not include the option of unilaterally refusing to fulfill the agreement, even in the absence of violations on the buyer’s part. As a result, we presented the client with two options for the development of events, in case that the buyer refused to fulfill the contract.

Option 1 The buyer has the right to demand in court the delivery of the goods specified in the agreement, which include: 

• filing a demand to compel the fulfillment of the obligation in kind, which will establish the obligation to supply the goods.

• collect a legal penalty for each day of failure to fulfill such an obligation 

The law allows you to collect a legal penalty for each day you are late in fulfilling a non-monetary obligation. In this case, each day of non-delivery of the goods will result in the accrual of a penalty. 

The law does not specify the amount of such a penalty, and court practice ranges from hundreds to millions of rubles per day, depending on the justification. For example, one of the largest such cases (also known as “astrent”) is Russian Railways' collection of a legal penalty from Siemens Mobility in the amount of more than 6 million rubles for each day of non-delivery of Sapsan trains. 

• collect penalties under a supply agreement. 

The supply agreement between our client and the buyer allowed collecting up to 5% of the cost of undelivered products as a penalty. 

Option 2 The buyer has the right to declare a refusal to fulfill the contract as a result of repeated delivery deadline violations 

Because our client-supplier's refusal to withdraw from the supply agreement does not result in the termination of the supply agreement, the supplier's delivery of goods will be delay. 

According to paragraph 1, 3 of Article 523 of the Civil Code, unilateral refusal to fulfill a supply agreement is permitted in case of a significant breach of the agreement by one of the parties. For the supplier, such a significant violation constitutes a repeated violation of the goods' delivery time. 

As a result, if the delivery time is violated, even for a portion of the product, the buyer will have the right to refuse to fulfill the supply agreement and related opportunities if the first violation and the second violation occur after notification of the need for delivery within a reasonable time (in practice, this is most often 10 days from the planned delivery time). 

  The buyer will have the right: 

• To refuse to fulfill the contract (even if part of the delivery is accepted) if there is a delay in fulfilling the obligation. 

The following point is particularly noteworthy: most suppliers believe that it is possible to deliver part of the goods while delivering the remaining part of the goods later than the specified period with minimal loss. However, in practice, this is not the case: if the agreement does not allow for partial delivery, the buyer is not required to accept partial delivery and may refuse to fulfill the entire agreement if at least a portion of the products are delayed. 

  This is exactly what was in our client’s agreement. 

• To recover the cost of the advance payment (for the entire product or part of it, depending on if part of the product is accepted). 

If, however, the buyer meets halfway and accepts some of the goods, the cost of the advance can be recovered for the portion of the goods that were not delivered on time. If he does not accept a portion of the products, he will be able to reclaim the entire advance. 

• to collect interest under Article 395 of the Civil Code of the Russian Federation (currently 15% per year) for each day of delay to refund the advance.
• to collect a contractual penalty from the first day of delay until receiving notice of refusal to fulfill the agreement.
• To collect the difference between the contract price and the more expensive contract that is concluded to replace the terminated one.

 
According to paragraph 1 of Article 520 of the Russian Civil Code, if the supplier fails to deliver the quantity of goods specified in the supply agreement within the time frame, the buyer has the right to purchase the undelivered goods from other persons, charging the supplier for all necessary and reasonable costs of acquisition. 

According to paragraph 1 of Article 524 of the Civil Code of the Russian Federation, if, within a reasonable period after termination of the agreement due to a violation of an obligation by the seller, the buyer bought goods from another person at a higher but reasonable price than what was provided for in the agreement, the buyer may present to the seller a claim for compensation for losses in the form of the difference between the price established in the agreement. 

For example, due to a delivery delay, the buyer rejects a contract worth 1,000,000 rubles and instead concludes an agreement in the amount of 1,500,000 rubles. In this case, the buyer will have the right to recover 500,000 rubles from the supplier. 

The supplier may challenge the recovery of the difference on the grounds that the transaction price is unreasonable, which requires submitting an alternative commercial supply proposal to the court. The risk analysis that was conducted allowed the client to make the correct (in our opinion) decision regarding the future of the supply agreement.