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property liability can only follow as a result of a breach of an obligation accepted by the guilty party by virtue of a law or a voluntary contract. Also, the amount of property compensation, in case of breach of obligations, including the penalty and the procedure for calculating the losses, is determined by the norms of the law or a contract concluded earlier between the parties. Even if there is a violation of the obligation, but the measure of property liability, other than compensation for damages, is not provided for such violation, the aggrieved party cannot invoke the customs and the practice of contractual relations with other contractors developed by the injured party in order to bring the guilty party to property liability.
The principle of full reimbursement in determining the amount of property liability of the parties of the option contractual structure is applied in the form of compensation by the guilty party of all losses incurred as a result of improper performance. The concept of losses is disclosed in Art. 15 of the Civil Code. Losses are understood as expenses that a person whose rights are violated, produced or will have to do to restore the violated right, loss or damage to his property (real damage), as well as unearned income that this person would have received under normal conditions of civil turnover if his right was not violated (loss of profit).
In practical entrepreneurial activities, the aggrieved party increasingly faces difficulties in proving lost profits, which is part of the damage caused. However, within the framework of option contractual arrangements, proving lost profits is much easier. For example, under the lost profit, we can mean the difference between the price of the goods at the time of the conclusion of the option contractual structure and the price of a similar product in the market at the moment the injured party claims the performance requirement. It is more difficult to prove the lost profit to the party, which is obligated within the framework of the option contractual structure. Such an aggrieved party will have to prove in full the causeeffect relationship between the improper performance of the binding party's obligations, for example, on payment for the delivered goods, and the inability thereby to execute the injured party's obligations to other contractors. An alternative
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way out of this situation may be to collect penalties, if it is determined between the parties in the contract or stipulated by the rule of law.
The principle of responsibility for faults when parties fail to perform contractual obligations in the framework of option contractual structures is expressed in the fact that a party that has not fulfilled its contractual obligations bears property liability only to the aggrieved party in the presence of guilt. The presence of guilt in the party violating the obligation is assumed. But the guilty party can be released from liability if it proves that improper performance occurred solely as a result of the actions or omissions of the injured party. In proving his innocence, a party that violates an obligation cannot invoke the guilty actions of its counterparties or other third parties, since the guilt is considered only within the framework of the relations of the parties to the option contractual structure.
In business activities, an important role is played by the mechanism for implementing enforcement of obligations. As such, property sanctions are mainly used148. If compensation for losses in connection with improper performance of the obligation to the injured party is a measure of restoring the violated right and stabilizes the civil turnover, the use of a penalty is punitive and is a measure of liability.
Taking into account that such contractual structures as an option to conclude a contract and an option agreement establish legal relationships of the parties for a future period of time, changes during this period of time of circumstances affecting the will of the parties to conclude a contract provided for by an option agreement or to perform actions stipulated in an option agreement may change, which makes it
148 Sanction in civil relations is a mechanism of property liability aimed at forcing a party to proper behaviour, as stipulated in the terms of the obligation. Y.K. Tolstoy notes that no legal relationship is unthinkable without the connection of its subjects with the state. The state, being the guarantor of the stability of civil legal relations, provides an administrative and imperious resource for compelling the guilty party to conduct that is stipulated by the terms of the obligation. In the absence of a sanction that allows one to compel the side of the obligation to proper behaviour, the very principle of the irrevocable obligation to commit certain actions, which constitutes the main essence of the civic obligation, is lost. (Tolstoy Y.K. To the theory of legal relations. – Publishing house of Leningrad university, 1959. P. 48.).
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undesirable for one of the parties to fulfil their obligations, be it supply of goods under an option agreement, or payment in under the agreement for the option.
In this case, the only thing that can ensure compliance with the principle of proper performance of obligations is the system of property liability of the parties of the option contractual structure, since the obligation loses its force and ceases to be an obligation only it is deprived of the sanction providing it149.
Responsibility of the parties of option contractual structures for improper performance of obligations also provides for a sectional mechanism. It is expressed in the form of a penalty. The legal definition of the forfeit is given in art. 330 Civil Code of the Russian Federation. Penalty (penalty, penalty) is the amount of money determined by law or by agreement, which the debtor is obliged to pay to the creditor in case of failure to perform or improper performance of the obligation, in particular in case of delay in performance. Upon demand for recovery of a penalty, the creditor is not obliged to prove damages caused to him. The creditor has no right to demand payment of a penalty if the debtor is not responsible for the failure or improper performance of the obligation.
In practical entrepreneurial activities, forfeits, and not damages, are the most effective means of restoring the property interests of the injured party, since it is upon collection of a penalty that the injured party is freed from the burden of proving that it has losses and their size.
Considering the general legal characteristic of the penalty KA. Grave notes that the penalty is inherent in the security and supplementary (accessory) functions. The basic legal function performed by the penalty is to strengthen the obligation relations by ensuring the interests of the creditor under the obligation, that is, the right of claim belonging to it. The accessory nature of the penalty follows from its security nature. According to K.A. Grave, if the main purpose of the penalty is that it ensures the interest of the creditor under the obligation, in other words, its
149 This opinion was expressed by O.S. Ioffe and now fully complies with the principle of fulfillment of the obligation, as set out in Art. 309 Civil Code of the Russian Federation. (Ioffe O.S. Law of obligation. – Moscow: Legal literature, 1975. P. 16).
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obligation-based right of claim, then a penalty is possible only there and in so far as and where there is some obligation. Consequently, a penalty always assumes the existence of some obligation, which it provides150. With the opinion of K.A. Grave should agree. A penalty for improper performance of an obligation cannot exist separately from the obligation itself. However, it is difficult to agree that the agreement on forfeit is accessory. In practical entrepreneurial relations, there are always contracts, which one of the parties is ready to conclude only if there are firm guarantees of performance by the counterparty, of the obligations assumed. One of such guarantees can be a penalty. Thus, the penalty agreement may be one of the subjective material conditions for the parties to the contract.
Legal definitions of option contractual structures, set out in Art. 439.2 (option to conclude an agreement) and art. 429.3 (option agreement) of the Civil Code of the Russian Federation do not contain an imperative indication of any types of penalties that could be applied between parties to option contractual arrangements as an essential condition. In principle, this approach of the legislator deserves approval. At the legislative level, only those essential conditions for option contractual arrangements have been established that could, to varying degrees, affect public interests. But the parties must take measures independently to protect their property rights.
Consequently, a penalty may be introduced into an option contractual arrangement as one of the essential conditions only if there is a corresponding requirement of one of the parties.
However, applying the contractual penalty established by the conditions of the option contractual structure, the aggrieved party may face the problem of its reduction in court. Article 333 of the Civil Code of the Russian Federation grants the guilty party the right to ask for a judicial penalty to reduce the forfeit, in cases where the penalty payable is clearly disproportionate to the consequences of breach
150 Grave K.A. Contractual penalty in Soviet law. Moscow: The State Publishing House of Legal Literature, 1950. P. 7-8.
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of the obligation. The legislator makes exceptions for business entities. In particular, if the obligation is violated by a person engaged in entrepreneurial activities, the court is entitled to reduce the forfeit if the debtor declares such a reduction. Also, the reduction of the forfeit determined by the contract and payable by the entrepreneur is allowed in exceptional cases if it is proved that collection of the penalty in the amount provided by the contract may result in the creditor receiving unreasonable benefits.
With such an approach of the legislator it is difficult to agree in connection with the contradiction to the principle of freedom of contract established by Art. 421 Civil Code of the Russian Federation. The parties of the option contractual structure are entitled, at their discretion, to establish contractual terms. The forfeit, established by agreement of the parties of the option contractual structure, is of a security nature and is aimed primarily at ensuring the proper performance of the obligation. The parties have a full view at the time of concluding an agreement on the existence of property liability for improper performance of contractual obligations and its amount, and moreover, the parties agree with the application of such property liability. Reduction of forfeit in court is nothing more than a measure to encourage an unfair party to improper performance of a contractual obligation secured by such a penalty. One should agree with the opinion of K.K. Lebedev, who emphasizes that a stable judicial arbitration practice on the reduction of penalties weakens the stimulating role of the penalty as a way of securing obligations and as a form of property civil liability151.
One of the ways to attract the person responsible for improper performance of the obligation of the party to the contractual structure to property liability is to enforce the obligation in kind. Compelling the performance of an obligation in kind is a component of the principle of real fulfilment of the obligation.
151 Lebedev K.K. Contractual penalty is not subject to reduction. Application of part 1 art. 33 of Civil Code of the RF // Arbitration disputes – 1999 – No 2 (6) – P. 119124.
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In his work, O.S. Ioffe noted that this principle has a decisive influence on the fulfilment of the obligation in the continuation of the entire period of its operation, both at the stage of normal development and in the event of a violation. But on each of the two listed stages he manifests himself in different ways.
As long as the obligation is not violated by any of the parties, it must be executed in strict compliance with all elements forming in its totality its content (by subject, term, method, etc.). In this case, therefore, the real means, at the same time, proper execution. The principle of real execution appears at this stage as a bilateral obligatory: not only the debtor is obliged to properly execute it, but the creditor has no right to evade acceptance of the performance of the debtor.
The situation, however, varies significantly as soon as the debtor violates any of its duties. If the obligation is violated, the possibility of proper execution in full is excluded: now it is impossible to observe the previous terms and individual conditions. But it remains an opportunity to commit in fact those actions that constitute the main goal of the obligation. The creditor has the right to demand that they be committed, despite the fact that the debtor paid a penalty or refunded damages caused by the violation. Hence, henceforth the principle of real execution is embodied, first of all, in the requirement for performance in kind, but not only in kind, but also with observance of all those conditions of proper execution that remain feasible after the violation committed. At the same time, in this second stage, the effect of this principle changes in yet another respect. From bilateral it is now transformed into one-sidedly compulsory: mandatory for the perpetrator of a breach that is not exempt from its obligations, but not for the creditor, who has the right to terminate the obligation due to the violation committed by the debtor152.
The above opinion is O.S. Ioffe also shares SA. Sarbash, who points out the need to separate the performance of the obligation, which is carried out at the will
152 Ioffe O.S. Law of obligation. – Moscow: Legal literature, 1975. P. 60-61.
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of the debtor and under duress. Coercion of the party to the contract to fulfil the obligation in kind is of protective nature153.
With regard to all contractual structures that can be attributed to the contractual institute of the option as a whole, it can also be concluded that the proper way to protect the violated rights of parties to such contractual structures will be not only the principle of real execution, but the set of the principle of real execution, recovery of damages and the requirement for payment of a penalty, depending on each specific case of violation of obligations.
Along with the requirement of real fulfilment of obligations within the framework of contractual structures, the parties are entitled to demand compensation for losses incurred as a result of improper performance of obligations within the framework of option contractual structures.
Compensation for losses due to improper performance of these types of contracts is of significant significance.
As already noted earlier, option contractual structures are used by business entities not only to reduce entrepreneurial risks from price changes in the relevant product market, but also to build other subsequent contractual relationships with other counterparties on the basis of concluded contracts with option elements.
In case of violation of the option agreement by the obliging party, the obliging party shall be entitled to claim damages only in the event of the termination of this agreement in court, in particular in connection with the loss of interest in its further execution.
Without the requirement to terminate the option contract in connection with the loss of interest in its further execution and before the expiration of its validity period, the obliging party may demand only the payment of a penalty specified in the contract for the delay in the delivery of goods and compensation of the amounts of the penalty paid to contractors for the delay in the delivery of the goods if the goods to be procured were intended for further sale to third parties, as well as any
153 Sarbash S.V. Execution of a contract obligation. – Moscow: Statut, 2005. P. 111.
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other kind of forfeit that the obliging party should have paid or paid in connection with the absence of exempted by the option contract of the goods.
At the same time, the causal relationship between the violation of the performance of obligations by the obliging party and the availability of damages will have to be proved by the obliging party.
Losses that may arise from the obligated party in connection with improper performance of obligations by the obliging party may be the costs of storing the goods beyond the period of its transfer to the obliging party, in the event the latter evades its acceptance, the costs associated with preparing for execution of obligations by the obligated party under the option contract, interest, for illegal use of funds, obliging the party in case of evasion from the timely payment of the delivered goods, as well as transportation expenses for the delivery of goods and its re-transportation in the event of evasion by the obliging party from its acceptance within the time limit specified in the option agreement.
Accordingly, each of the parties has the right to demand compensation for loss of profit provided that there is evidence of a causal link between the violations of its contractual obligations committed by the other party and the impossibility of obtaining the planned benefit as a result of this.
Property sanctions provided for by the option contractual arrangement are not a mechanism for compensation of losses but constitute a measure of civil liability aimed at encouraging the parties to an option agreement to properly fulfil their contractual obligations.
The only controversial issue remains the question of compensation by the guilty party to the injured side of the lost profit.
The lost profit can arise only as a result of improper performance by the guilty party of a contractual obligation that is material (commodity) in nature. However, the only obligation that exists with the obligated party at the time of the option agreement is the obligation to enter into a contract. This obligation does not in itself create a commodity relationship. However, the obliging party counts not
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only on the conclusion of the main contract, but also plans its further entrepreneurial activity on the basis of the condition for its proper execution. If the obliged party refuses to enter into the main contract, the obliging party loses those material benefits that it expects to acquire in the performance of the main contract, and by virtue of which it can already be established further contractual relations with third parties.
Therefore, if the fulfilment of obligations for the conclusion of the main contract within the framework of the option agreement is improperly performed, the obligated party also must compensate the obliging party for the lost profit.
Involving the guilty party of the option contractual structure to property liability is possible only under the condition of the validity of the option contractual structure and, accordingly, the contract mediated by the option contractual structure. The problem of the use of option contractual structures is also the problem of their invalidity, which in its nature differs from the non-conclusion of the contract.
Being contractual structures, and having independent legal definitions, the option agreement, as well as the option contract, have signs of invalidity common to all contractual structures.
The basis of invalidity of the contract is always the lack of coordination of the will of its parties, because according to Art. 420 of the Civil Code of the Russian Federation the agreement recognizes the agreement of the parties, that is, the mutual will154.
154 N.D. Shestakova proposes a different, more detailed procedure for classifying the grounds for the invalidity of the contract: 1) the contradiction of the law (as a general basis for invalidity), 2) the content defect, 3) the form, 4) the subject, 5) the will. With such a classification of the grounds, it is difficult to agree, since all these signs indicate the impossibility of a proper expression of will. For instance, the conclusion of an agreement by an unauthorized person indicates that the representative did not express his will properly for the conclusion of the contract. Similarly, the invalidity of the contract appears due to the absence of one of the essential conditions in the contract. In this case, there is no agreement on the will of the parties to the contract. Proposed by N.D. Shestakova classification of invalidity refers to the types of invalid contracts, but not to the grounds. (Shestakova N.D. Invalidity of transactions. 2nd edition, updated and revised – Saint-Petersburg: R. Aslanov’s Publishing house “Legal Center Press”, 2008. P. 24).
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Absence of mutual will of the parties cannot give rise to any legal consequences in the form of the emergence of certain mutual rights and obligations that constitute the subject of the contract, but only indicates the intention of persons to enter into contractual legal relations.
The negative consequences of the invalidity of option contractual structures have a more significant significance in business activity than the invalidity of a bilateral contract. Under the threat of failure to fulfil the obligations, the whole chain of other entrepreneurial contracts can be placed, in order to ensure the execution of which option agreements or agreements were concluded.
Earlier it was repeatedly noted that option contractual structures have a dual subject of the contract. This is the condition for the performance by the obliged party of actions (the delivery of goods, etc.) upon receipt of the relevant demand of the obliging party and the acquisition by the obliging party of the property right of the requirement from the obligated party to commit such actions. The subject of the contractual option construction is united by the common economic goal of the parties.
In connection with the ambiguity of the items of option contractual structures, it is quite natural to ask whether it is possible to preserve a deal based on one of the option contractual structures in force if a number of conditions defining only one of the two items of the option contractual arrangement are invalidated.
This issue is significant in practical business activities, as it allows to maintain the contractual relations of the parties, albeit in a modified form.
In entrepreneurial activity, the preservation of the contract in a modified form means a partial loss by its parties of the economic benefit to which they counted when concluding the original contract. At the same time, the partial loss of economic benefit means the preservation of some of the material benefits that both sides of the contract concluded in the original form should have received.