Agreements made by residents of Special Economic Zones (SEZs) are quite thoroughly regulated by the Federal Law on Special Economic Zones in the Russian Federation (the Law). At first glance, everything is transparent and predictable for investors, as the basis of an agreement is their own business plan, and the term of such agreements is usually quite lengthy.
However,life brings its own adjustments to entrepreneurs’ plans, and in a few years market situation may change, making it impossible for the company to maintain the investments figures envisaged in the agreement or finalize the construction of the facility in the SEZ.
Come to Terms on the Shore
It is hardly possible to eliminate such business risks completely, but entrepreneurs can consider legal options for minimizing losses in case of amendments to or termination of the agreement. To do this, it is essential to pay attention to the provisions regulating amendments to the agreement already at the time of its conclusion. Although the amendment procedures are established by the Law, based on our experience, SEZ management companies are reluctant to modify agreements based on entrepreneurs’ requests for so long as the grounds for changes are not regulated by the agreement itself.
As during the implementation of the project circumstances may – and do – change, SEZ residents are often unable to follow the original conditions of the agreement. The Law lists situations which are considered ‘major breach’, including residents' failure to make investments in the prescribed amounts and missed deadlines for the construction of facilities in the SEZ. However, the Law does not specify what ‘major’ means, and in fact any delay by the entrepreneur during project implementation may lead to termination of the agreement and deprivation of the SEZ resident status. A clear procedure for amending an agreement is also an opportunity to protect yourself from termination of the agreement at the initiative of governmental authorities or SEZ management companies.
To execute or grant clemency, that is the question!
According to the Law, an agreement may be terminated for cause either by mutual consent of the parties or by court. With this, if the agreement is terminated by court, the former resident may be obliged to pay a penalty, which would be a percentage of intended investment and thus quite high.
Nevertheless, the defendant may file a motion to reduce the penalty to be supported by evidence of the impossibility to perform. We once successfully represented a SEZ resident from Astrakhan Region, when the penalty was finally halved five times: the regional Ministry of Industry filed a lawsuit against our client to terminate the contract and collect a penalty of RUB 5 mln for breach of SEZ investment terms. The client failed to comply during COVID-19 pandemic, and the project lost its appeal to the client. We filed the evidence that the client had indeed attempted to amend the business plan and agreement with SEZ, but SEZ administration had ignored their proposals. We also submitted documents in confirmation of the client’s financial decline. As a result, the court terminated the contract, but found the pre-set penalty disproportionate to the breach and instead ordered the defendant to pay a penalty of RUB 1 mln only. The decision was upheld on appeal.
As we see it, ‘change of circumstances’ may refer not only to unstable foreign policy situation, but also the termination of relations with co-investors. In such cases courts considers all arguments and may reduce the penalty if so requested.