Latvian Commercial Law and Standard Agreement terms: New Risks or Opportunities? Apr 21, 2010
1. Introduction
As of 1 January 2010 the Latvian Commercial Law (Komerclikums, CL) boasts a brand new Commercial agreements chapter, which has created the illusion that significant changes have been introduced.
As of 1 January 2010 the Latvian Commercial Law (Komerclikums, CL) boasts a brand new Commercial agreements chapter, which has created the illusion that significant changes have been introduced.
Sometimes lawyers have to act like magicians, who translate the complex play of words used in the legal acts into a short and simple story.
Briefly – the Commercial agreements chapter of the Commercial Law (for good or bad) is unable to create even the smallest earthquake in the kingdom of Latvian business law and the business operations of those companies that extensively use sophisticated standard forms of agreements in their business practice.
The Commercial agreements chapter does not introduce any material change that would require material adjustments to the everyday operations of a company. Although, if we look at the Commercial agreements chapter closer, there are a few interesting issues or beauties. This overview is not complete and some of the subchapters are not analysed. Nevertheless, the new Commercial agreements chapter should motivate companies to return to the texts of their standard agreements (terms) on purchase or sale of commodities or on supply of services to improve them and preserve them from the toxic influence of the new Commercial agreements chapter. By improving the standard forms, companies improve their operational strength, because the risk of getting into trouble with third party claims is materially reduced in terms of the amount, time, and forum of such claims.
Unfortunately, the text of the Commercial agreements chapter does not indicate which provisions are mandatory and what can be waived by the parties signing the agreement. As of January 2010 all B2B relations are within the domain of Commercial agreements including all the beauties described below.
2. Commercial Custom
One of the beauties of the Commercial agreements chapter is reference to a “commercial custom” or “trading practices” (CL Art. 391). The new regulation provides that, when resolving disputes, one should take into account inter alia the prevailing custom of the particular industry to understand the intentions and actions of the parties. From one perspective that allows the leading industry players (e.g. advertising, construction, etc.) to establish such trading practices through their associations and thus enables the parties to a dispute to refer to these approved trading practices. From a different perspective, application of commercial custom can become a real threat and therefore, if possible, the standard agreements should expressly exclude application of the commercial custom to the relationship of the parties.
3. Risk of Intermediaries
Another beauty of the Commercial agreements chapter is explicit provision that those persons who assisted with the transaction are entitled to remuneration even if it has not been agreed (CL, Art. 395). It follows that in such transactions as, for instance, real estate deals – lease, acquisition – the intermediary may claim remuneration from both sides. In addition, this means that by acceptance of third party assistance to the transaction including its preparation etc., there might arise an obligation to pay for the services. It is truly unorthodox that even random and indirect assistance by some third party may lead to liability to pay remuneration regardless whether the deal succeeded or not.
Therefore, to limit this liability it is important to agree who provides services to whom, what the fees are and when the fees become payable. Previously the receipt of the service fee was the risk of the service provider, now it has become the risk of the recipient of the service.
4. Lien over Movables
The Commercial agreements chapter further provides a right of lien over the movables of another company (CL, Art. 399). Indeed, a greater legal certainty can be achieved by opposite regulation – prohibition to exercise a right of lien to facilitate review of the dispute in the courts and not leave it to a “power struggle” – the one who incurs the largest loss will give up in the dispute.
The simplest example is a car that is delivered to a service shop for repair or technical design documents during construction works (if an architect is not paid because of quality concerns, then the architect may refuse to deliver the design documents to the client or the construction company), and obviously the client or the construction company will give up due to damages they may incur if construction is delayed.
Could an IT company exercise its right to have lien over the software or its application developed for the client by denying access to the software if there is a dispute in which the IT company has weak arguments or does not have a sound position?
It appears advisable to provide in the standard terms for exclusion of the right to exercise the lien by any of the parties.
5. Time Bar – 3 years
Claims arising from commercial transactions become time barred within 3 years (CL, Art. 406). It follows that a lawsuit should be commenced within 3 years (from exactly which moment?) and it is not enough to file a formal complaint with the defaulting party.
There is always the unclear question related to long term projects or long term agreements – when do the rights of claim expire if the cause of action or the breach arose a long time ago, but the agreement will expire only this year?
Again, in comparison with other chapters of the Commercial Law, it is not explicitly stated whether the parties may agree to have a different time bar. A typical situation may arise in the context of an M&A deal when the parties should deal with the tax risks of the target. With regard to tax claims, the buyer of the target usually desires to have at least a 4-5 year time bar. What do we do in this situation?
How to deal with the standard agreements that provide for a shorter time bar than 3 years? Will this time bar be valid?
6. Purchase with a Specification – the Buyer’s Risk
As of 1 January 2010 in cases when the agreement provides for the buyer’s right to specify the goods, the seller is entitled to provide the specification itself if the buyer is not prompt enough in exercising its right. Furthermore, the sellers will be entitled to demand payment for these goods (where the sellers have prepared specification, CL, Art. 409). If the buyer refuses to pay, the seller will be entitled to sell the goods at auction (CL, Art. 408).
While Civil Law (Civillikums) sets forth the principle that the seller must prove that the buyer has ordered the specific goods, the Commercial agreements chapter does quite the opposite – if the buyer is slow with specification, then the seller will propose to the buyer its own idea about the desired goods, for instance, the goods that have remained in the seller’s warehouse for too long.
How to protect the buyer from dishonest sellers? Should one avoid signing any documents unless there is an agreed specification? How to deal with industries where a long-term agreement is a part of everyday business or the buyer does not even know which specification is preferable or more suitable for his purposes?
Obviously, the usual question arises again – can the parties agree on the exclusion of the application of this section to their contractual relationship?
7. Notice on Damaged Goods Must be Made with no Delay
More attention should be paid to timely inspection of the goods upon delivery. The Commercial agreements chapter defines the duty of the buyer – the buyer must inspect the goods without any delay and should immediately notify the seller of any defects (CL, Art. 411). Basically, this means that the buyer should not accept any goods unless it has inspected them in detail.
It goes without saying that in real life many things work differently. It is difficult to imagine how to apply these rules in cases where the verification of the capacity of the goods cannot be tested upon delivery. For example, a large organisation receives delivery of equipment, where some of the equipment is stored in the warehouse and its quality remains untested for a substantial period of time. The buyer should be aware of the position of the seller. Whenever the buyer files a complaint about damaged or non-conforming goods, the seller will have a formal argument that the complaint was filed too late.
Standard terms help to avoid disputes, therefore it is worthwhile checking whether the deadlines set for complaints could be shortened or extended depending on the position of the company – the seller or the buyer.
8. Leasing Contracts Become Unbalanced
It is not surprising that leasing contracts deserve a subchapter in the Commercial agreements chapter. There is a section that deserves special attention and it appears to be well prepared and polished by the financial institutions (CL, Art. 467). It runs as follows: “lessor [e.g. a leasing company] is entitled to terminate the leasing agreement and demand re-delivery of the leased assets if (..) the fulfilment of obligations becomes excessively burdensome due to objective change of circumstances.”
It is important to note that the lessees cannot terminate the leasing contract if the fulfilment of the obligations becomes excessively burdensome on the grounds of changed circumstances. It appears unfair, if only one of the parties to the agreement is entitled to these rights. In this regard academics from the legal world may have substantial arguments regarding Art. 1587 of the Civil Law, which enshrines one of the civil law principles that no hardships whatsoever release a party from fulfilment of its obligations.
9. Summary
Companies which lack the tradition of working with highly detailed standard forms are urged to develop these standard agreements compatible with the commercial agreements regulation.
Those companies that actively use the standard forms should review these forms and recheck their contents against the background of the new commercial agreements regulation in the Commercial Law to reduce the new legal risks and to state clearly which of the general rules do not apply to the contractual relations in question.
For further information please contact Mr Gints Vilgerts
Briefly – the Commercial agreements chapter of the Commercial Law (for good or bad) is unable to create even the smallest earthquake in the kingdom of Latvian business law and the business operations of those companies that extensively use sophisticated standard forms of agreements in their business practice.
The Commercial agreements chapter does not introduce any material change that would require material adjustments to the everyday operations of a company. Although, if we look at the Commercial agreements chapter closer, there are a few interesting issues or beauties. This overview is not complete and some of the subchapters are not analysed. Nevertheless, the new Commercial agreements chapter should motivate companies to return to the texts of their standard agreements (terms) on purchase or sale of commodities or on supply of services to improve them and preserve them from the toxic influence of the new Commercial agreements chapter. By improving the standard forms, companies improve their operational strength, because the risk of getting into trouble with third party claims is materially reduced in terms of the amount, time, and forum of such claims.
Unfortunately, the text of the Commercial agreements chapter does not indicate which provisions are mandatory and what can be waived by the parties signing the agreement. As of January 2010 all B2B relations are within the domain of Commercial agreements including all the beauties described below.
2. Commercial Custom
One of the beauties of the Commercial agreements chapter is reference to a “commercial custom” or “trading practices” (CL Art. 391). The new regulation provides that, when resolving disputes, one should take into account inter alia the prevailing custom of the particular industry to understand the intentions and actions of the parties. From one perspective that allows the leading industry players (e.g. advertising, construction, etc.) to establish such trading practices through their associations and thus enables the parties to a dispute to refer to these approved trading practices. From a different perspective, application of commercial custom can become a real threat and therefore, if possible, the standard agreements should expressly exclude application of the commercial custom to the relationship of the parties.
3. Risk of Intermediaries
Another beauty of the Commercial agreements chapter is explicit provision that those persons who assisted with the transaction are entitled to remuneration even if it has not been agreed (CL, Art. 395). It follows that in such transactions as, for instance, real estate deals – lease, acquisition – the intermediary may claim remuneration from both sides. In addition, this means that by acceptance of third party assistance to the transaction including its preparation etc., there might arise an obligation to pay for the services. It is truly unorthodox that even random and indirect assistance by some third party may lead to liability to pay remuneration regardless whether the deal succeeded or not.
Therefore, to limit this liability it is important to agree who provides services to whom, what the fees are and when the fees become payable. Previously the receipt of the service fee was the risk of the service provider, now it has become the risk of the recipient of the service.
4. Lien over Movables
The Commercial agreements chapter further provides a right of lien over the movables of another company (CL, Art. 399). Indeed, a greater legal certainty can be achieved by opposite regulation – prohibition to exercise a right of lien to facilitate review of the dispute in the courts and not leave it to a “power struggle” – the one who incurs the largest loss will give up in the dispute.
The simplest example is a car that is delivered to a service shop for repair or technical design documents during construction works (if an architect is not paid because of quality concerns, then the architect may refuse to deliver the design documents to the client or the construction company), and obviously the client or the construction company will give up due to damages they may incur if construction is delayed.
Could an IT company exercise its right to have lien over the software or its application developed for the client by denying access to the software if there is a dispute in which the IT company has weak arguments or does not have a sound position?
It appears advisable to provide in the standard terms for exclusion of the right to exercise the lien by any of the parties.
5. Time Bar – 3 years
Claims arising from commercial transactions become time barred within 3 years (CL, Art. 406). It follows that a lawsuit should be commenced within 3 years (from exactly which moment?) and it is not enough to file a formal complaint with the defaulting party.
There is always the unclear question related to long term projects or long term agreements – when do the rights of claim expire if the cause of action or the breach arose a long time ago, but the agreement will expire only this year?
Again, in comparison with other chapters of the Commercial Law, it is not explicitly stated whether the parties may agree to have a different time bar. A typical situation may arise in the context of an M&A deal when the parties should deal with the tax risks of the target. With regard to tax claims, the buyer of the target usually desires to have at least a 4-5 year time bar. What do we do in this situation?
How to deal with the standard agreements that provide for a shorter time bar than 3 years? Will this time bar be valid?
6. Purchase with a Specification – the Buyer’s Risk
As of 1 January 2010 in cases when the agreement provides for the buyer’s right to specify the goods, the seller is entitled to provide the specification itself if the buyer is not prompt enough in exercising its right. Furthermore, the sellers will be entitled to demand payment for these goods (where the sellers have prepared specification, CL, Art. 409). If the buyer refuses to pay, the seller will be entitled to sell the goods at auction (CL, Art. 408).
While Civil Law (Civillikums) sets forth the principle that the seller must prove that the buyer has ordered the specific goods, the Commercial agreements chapter does quite the opposite – if the buyer is slow with specification, then the seller will propose to the buyer its own idea about the desired goods, for instance, the goods that have remained in the seller’s warehouse for too long.
How to protect the buyer from dishonest sellers? Should one avoid signing any documents unless there is an agreed specification? How to deal with industries where a long-term agreement is a part of everyday business or the buyer does not even know which specification is preferable or more suitable for his purposes?
Obviously, the usual question arises again – can the parties agree on the exclusion of the application of this section to their contractual relationship?
7. Notice on Damaged Goods Must be Made with no Delay
More attention should be paid to timely inspection of the goods upon delivery. The Commercial agreements chapter defines the duty of the buyer – the buyer must inspect the goods without any delay and should immediately notify the seller of any defects (CL, Art. 411). Basically, this means that the buyer should not accept any goods unless it has inspected them in detail.
It goes without saying that in real life many things work differently. It is difficult to imagine how to apply these rules in cases where the verification of the capacity of the goods cannot be tested upon delivery. For example, a large organisation receives delivery of equipment, where some of the equipment is stored in the warehouse and its quality remains untested for a substantial period of time. The buyer should be aware of the position of the seller. Whenever the buyer files a complaint about damaged or non-conforming goods, the seller will have a formal argument that the complaint was filed too late.
Standard terms help to avoid disputes, therefore it is worthwhile checking whether the deadlines set for complaints could be shortened or extended depending on the position of the company – the seller or the buyer.
8. Leasing Contracts Become Unbalanced
It is not surprising that leasing contracts deserve a subchapter in the Commercial agreements chapter. There is a section that deserves special attention and it appears to be well prepared and polished by the financial institutions (CL, Art. 467). It runs as follows: “lessor [e.g. a leasing company] is entitled to terminate the leasing agreement and demand re-delivery of the leased assets if (..) the fulfilment of obligations becomes excessively burdensome due to objective change of circumstances.”
It is important to note that the lessees cannot terminate the leasing contract if the fulfilment of the obligations becomes excessively burdensome on the grounds of changed circumstances. It appears unfair, if only one of the parties to the agreement is entitled to these rights. In this regard academics from the legal world may have substantial arguments regarding Art. 1587 of the Civil Law, which enshrines one of the civil law principles that no hardships whatsoever release a party from fulfilment of its obligations.
9. Summary
Companies which lack the tradition of working with highly detailed standard forms are urged to develop these standard agreements compatible with the commercial agreements regulation.
Those companies that actively use the standard forms should review these forms and recheck their contents against the background of the new commercial agreements regulation in the Commercial Law to reduce the new legal risks and to state clearly which of the general rules do not apply to the contractual relations in question.
For further information please contact Mr Gints Vilgerts
