Resolution of Supreme Arbitration Court of the Russian Federation concerning penalty reduction

The Resolution No. 81 of the Plenum of the Supreme Arbitration Court of the Russian Federation “On Certain Aspects of Applying Article 33 of the Russian Civil Code” dated 22 December 2011 (the “Resolution”) concerns penalty reduction.


From the practical point of view the following matters can be interesting:

1. The Resolution implies that the penalty must be appropriate to the consequences of a breach.
2. Contractual terms on non-application or restriction of Article 333 of the Russian Civil Code, as well as introduction of a penalty floor or a cap do not preclude the court from deciding to reduce a penalty.
3. The Resolution’s clarifications regarding penalty reduction on the basis of Article 333 of the Russian Civil Code will also apply when the penalty is provided for by law.
4. The penalty may be reduced by the court only at the request of the defendant. The request may be submitted only during consideration of the case in accordance with the rules of the first instance court. Such a request may not, in itself, be deemed to constitute the defendant's consent to the debt or breach of an obligation.
5. The defendant's arguments regarding impossibility of performing an obligation owing to financial hardship, non-performance by counterparties, indebtedness to other creditors, the defendant's funds or other property attachment, non-receipt of budget funds, voluntary repayment of debt in full or in part at the time of the case hearing, performance by the defendant of socially important functions, and the debtor's obligation to pay interest for use of capital may not serve as grounds for penalty reduction under Article 333 of the Russian Civil Code.
6. The terms for use of other people's funds in the event of failure to perform or inappropriate performance by the debtor of a monetary obligation may not be more favourable for it than the terms for use within lawful business activity (for instance, under loan agreements). In order to match the penalty to the consequences of a monetary obligation breach, the courts may rely on the refinancing rate of the Bank of Russia within the breach period. Each party retains the right to prove another penalty amount on the basis of the average payment under entrepreneurs' short-term credits for working capital replenishment at the debtor's location within the breach period. The penalty amount so determined may be reduced by the court in exceptional circumstances and not to below the amount based on a single refinancing rate of the Bank of Russia (8% per annum since 26 December 2011). Any further reduction is exceptional and permitted when the creditor's losses are reimbursable by means of a funds use payment substantially exceeding a regular one.
7. Debiting of the penalty from the debtor's account (clause 2, Article 847 of the Russian Civil Code) does not exclude application of Article 333 of the Russian Civil Code, for instance, through the debtor lodging an independent claim to recover the overpaid sum. In the event of voluntary penalty payment, the debtor will not have the right to claim a reduction under Article 333 of the Russian Civil Code.
8. In the event of breach of an agreement secured by advance payment, the advance payment recipient and the advance payment payer will, by law, have the right to raise the issue of application of Article 333 of the Russian Civil Code to reduce the amount payable under clause 2, Article 381 of the Russian Civil Code.
9. The contractual condition based on Article 329 of the Russian Civil Code that, in the event of a breach by the debtor, it may transfer not its funds but other of its property to the creditor, does not conflict with the law. In the event of transfer of fungible items, the court may reduce the quantity thereof in relation to Article 333 of the Russian Civil Code.
10. The court of appeal, at the request of the relevant party, may either reduce the rate reserved or change the rate reduced by the first instance court.
11. The cassation court does not have the right to change the penalty amount since determination by the court of a fixed penalty does not constitute a conclusion regarding application of the law, save for increasing the penalty when it has been reduced:
a) in the absence of a request from the defendant;
b) to below the single refinancing rate of the Bank of Russia (save for the exceptional case specified in clause 6 hereof).