Key considerations in applying settlements
Discharge of liabilities via accord and satisfaction: critical aspects to note.
Settlement by compromise is one of the most flexible methods for terminating obligations. However, its practical application raises numerous questions: what instruments can be used as a settlement, what are the peculiarities of qualifying a settlement agreement according to judicial practice, when must the subject of the settlement be registered, and other related issues. Vladimir Zagnetin, a lawyer at INTELLECT, explains the nuances of applying settlement agreements.
The current domestic legal framework dedicates only one article in the Civil Code to settlements, the brevity of which allows us to quote it in full:
Article 409. Settlement by Compromise
Under an agreement between the parties, an obligation may be terminated by providing a settlement — payment of monetary funds or transfer of other property.
One sentence, sixteen words — judicial practice could not avoid the fate of this primary source of rules governing settlements. Currently, the field of settlement agreements is governed by Resolution No.6 of the Plenum of the Supreme Court of the Russian Federation dated June 11, 2020, «On Certain Issues of Applying the Provisions of the Civil Code of the Russian Federation on the Termination of Obligations» (hereinafter referred to as Resolution No.6 of the Plenum of the Supreme Court).
Lower courts, when considering disputes related to settlements, adhere to the «party line» and align with the position of the higher court.
Alternative and facultative obligations
In light of the general rules on settlements, creditors should remember that, by default, the mechanism of a settlement is inherently «debtor-friendly» as it treats the settlement obligation as facultative (Paragraph 3 of Resolution No.6 of the Plenum of the Supreme Court).
The legal system allows the parties to subject the settlement to the rules of alternative obligations. However, in such cases, it is necessary to explicitly include a provision in the settlement agreement stating that the creditor has the right, at their discretion, to demand either the performance of the original obligation or the provision of the settlement (Paragraph 2 of Resolution No.6 of the Plenum of the Supreme Court).
This distinction is significant for the creditor because, in the case of an alternative obligation, the creditor has the right to demand one of the alternative performances at their discretion. In contrast, under a facultative obligation, it is the debtor who decides whether to perform the primary obligation or the facultative one.
Thus, if the rules regarding alternativeness were not explicitly established in the settlement agreement and the debtor fails to provide the facultative performance within the relevant period (i.e., does not provide the settlement), the creditor is entitled to demand only the performance of the original obligation and not the provision of the settlement (Paragraph 5 of Resolution No.6 of the Plenum of the Supreme Court, Ruling of the Ural District Arbitration Court dated June 4, 2024, in Case No.F09-2379/24).
Scope of application of settlements
Since Article 409 of the Civil Code refers to «obligation» in general terms, judicial practice reasonably concludes that settlements can terminate not only contractual relationships but also, for example, conditional or restitutionary obligations (Paragraph 2 of Resolution No.6 of the Plenum of the Supreme Court).
As for delictual obligations not explicitly mentioned, there are №special grounds for excluding them from the scope of settlement agreements. However, disputes over settlements in delictual obligations are relatively rare in state arbitration courts (Ruling of the Federal Arbitration Court of the Volga District dated September 27, 2005, in Case No.A65-28030/2004-SG3-28) and are more commonly found in general jurisdiction courts, particularly in cases involving traffic accidents (Decisions of the Civil Chamber of the Eighth Cassation Court of General Jurisdiction dated December 20, 2023, in Case No.8G-27043/2023[88-26849/2023], and the Third Cassation Court of General Jurisdiction dated March 14, 2024, in Case No.8G-3906/2024[88-6075/2024]).
Settlements for claims with expired statutes of limitations
Regarding «time-barred» obligations, the expiration of the statute of limitations for the original obligation does not prevent the conclusion of a settlement agreement, as the expiration of the statute of limitations itself does not terminate the obligation but merely provides the opposing party with a corresponding defense.
In such cases, a settlement agreement concluded in writing may, depending on its content, be qualified as an acknowledgment of the debt (Paragraph 9 of Resolution No.6 of the Plenum of the Supreme Court).
Types of performances under settlement agreements
It is worth noting that the literal wording of the law explicitly mentions only monetary funds and property as possible objects of performance.
However, judicial practice has given this norm an ultra-expansive interpretation, bordering on contra legem, allowing virtually any performance — such as the performance of work or the provision of services — as the subject of a settlement (Paragraph 2 of Resolution No.6 of the Plenum of the Supreme Court).
From a practical perspective, there is a point in evaluating this interpretation — it clearly contradicts the letter of the law. It is equally clear that this expansive interpretation should be regarded as the true rule to rely on when determining the subject of a settlement.
Therefore, despite the law specifying only monetary funds and property as the subject of a settlement, due to the established and consistent expansive interpretation, the parties are entitled to specify not only monetary funds and other property (such as goods or property rights) but also work and services as the subject of a settlement agreement.
Form of the agreement
As a general rule, under Paragraph 1 of Article 452 of the Civil Code, an agreement to amend or terminate a contract must be executed in the same form as the original contract unless otherwise provided by law, other regulatory acts, the contract itself, or customs.
A settlement agreement is one of those cases where «...unless otherwise provided by law.»
Legislation traditionally links the form of a contract to the nature of the property constituting its subject matter. For settlements, these rules «override» the requirement for the form of the settlement agreement to match the form of the original contract.
In this case, the key principle applicable to the form of a settlement agreement is as follows: if the form of the original contract (e.g., simple written form) and the form of the settlement agreement (e.g., notarial form) differ, the stricter of these rules applies to the settlement agreement (Paragraph 2 of Resolution No.6 of the Plenum of the Supreme Court).
State registration of the subject of a settlement
When concluding a settlement agreement where the subject is «registrable» property, it is important to remember that, under Paragraph 2 of Article 8.1 of the Civil Code, rights to such property arise, change, and terminate upon the entry of the corresponding record in the state register.
Regarding settlements, this means that the mere conclusion of a settlement agreement is insufficient. In the absence of state registration of the transfer of ownership of immovable property provided as a settlement, the previous owner remains the legal owner (Ruling of the Supreme Court of the Russian Federation dated April 27, 2017, in Case No.55-PEK17, Case No.A03-8209/2015).
There will be №exceptions even if the settlement is provided under a settlement agreement, as the court's approval of the settlement agreement without registering the transfer of ownership does not result in the legal consequences intended by the parties (Ruling of the Supreme Court of the Russian Federation dated June 6, 2019, in Case No.307-ES18-10383(3), Case No.A56-61896/2016).
Considering that an agreement to provide immovable property as a settlement grants ownership rights to the acquirer of the property only upon registration of the property rights, such an agreement is considered fulfilled only after the creditor acquires the title of ownership of the immovable property in accordance with the law.
— Ruling of the Supreme Court of the Russian Federation dated January 26, 2021, in Case No.14-KG20-12-K1
If one of the parties to the settlement agreement refuses to cooperate in the state registration process, the other party has the right to file a claim compelling the registration of the transfer of ownership (Paragraph 5 of Resolution No.6 of the Plenum of the Supreme Court, Ruling of the Northwestern District Arbitration Court dated June 15, 2023, No.F07-7213/23 in Case А05-8131/2022).
Settlement as a real transaction
Separately, it is worth mentioning how courts interpret settlements as «real transactions» in the most common scenario where there is a time gap between the conclusion of the settlement agreement and the provision of the settlement.
According to the meaning of Paragraph 2 of Article 433 of the Civil Code, a real contract is deemed concluded from the moment of property transfer — not from the moment the parties reach an agreement and conclude the contract.
A literal interpretation of Article 409 of the Civil Code suggests that a settlement agreement is a real transaction. Therefore, legal consequences arise not from the moment the settlement agreement is reached (in the specific case of a settlement agreement) but from the moment actual performance is received.
— Ruling of the Moscow District Arbitration Court May 17, 2024, No.F05-16414/16 in Case No.A40-188688/2015
This raises a reasonable question about the validity of this position, as it involves a clear conflation of the conclusion of the contract with its legal consequences and performance.
We cannot, in such cases, refer to a settlement as a real transaction, as the legal consequences of the settlement arise precisely after its conclusion — the debtor is granted a moratorium and the right to replace the primary obligation with a facultative one, while the creditor assumes the obligation to accept such facultative performance (Paragraph 3 of Resolution No.6 of the Plenum of the Supreme Court).
Most likely, in such situations, courts mean that the termination of the primary obligation occurs only after the provision of the settlement subject. However, this, of course, does not constitute a real transaction.
In fact, we are dealing with a consensual transaction, the direct result of which is the granting of the debtor the right to facultative performance, i.e., the transformation of the primary obligation into a facultative one.
Thus, when concluding settlement agreements in situations where there is a time gap between signing the agreement and providing the settlement, it is necessary to proceed from the consensual nature of the settlement, which binds the parties with legal consequences (not limited to the termination of the primary obligation) only after the conclusion of such an agreement.
Non-performance of the settlement obligation
The mechanism of a settlement implies that, upon concluding a settlement agreement, a temporary moratorium is activated for the primary claim. Therefore, it is important to understand that, depending on the period, the creditor will have different rights and obligations concerning the debtor.
While the temporary moratorium is in effect, the creditor has №right to demand the performance of the original obligation (Paragraph 4 of Resolution No.6 of the Plenum of the Supreme Court).
If the debtor provides the settlement after the expiration of the moratorium, the creditor has the right to reject the settlement and demand the performance of the original obligation (Paragraph 4 of Resolution No.6 of the Plenum of the Supreme Court).
If the debtor fails to provide the settlement before the expiration of the temporary moratorium, the creditor is entitled to demand only the performance of the original obligation and not the provision of the settlement (Paragraph 5 of Resolution No.6 of the Plenum of the Supreme Court).
A settlement agreement does not create a new obligation for the debtor and, therefore, does not give rise to the creditor's right to demand the provision of the settlement. In the event of non-performance of the settlement agreement within the timeframe agreed upon by the parties, the creditor is entitled to demand the performance of the original obligation and the imposition of liability measures against the debtor for non-performance.
— Ruling of the Ural District Arbitration Court dated November 14, 2024, No.F09-5744/24 in Case A60-54560/2023
Given the rather modest wording of the rules on settlements in the law, when drafting a settlement agreement, the parties must rely on the interpretation of these rules in the judicial practice of higher courts, particularly on Paragraphs 2-9 of Resolution No.6 of the Plenum of the Supreme Court of the Russian Federation dated June 11, 2020, «On Certain Issues of Applying the Provisions of the Civil Code of the Russian Federation on the Termination of Obligations.»
Source: Newspaper «Economic Journal-Lawyer» (No.03 (1351) / 2025)
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