Over-the-counter swap contract: from legal qualification to case law on derivative financial instruments

Swap contracts are widely used in international financial markets. These commercial transactions allow their parties to manage and transfer a variety of risks relating to interest and foreign exchange rates, volatility of commodities prices and other underlying assets. According to Russian laws swaps belong to a wide class of derivative financial instruments. In absence of the legal rules in the Russian Civil Code which may be directly applicable to derivatives, these instruments are regulated by a Bank of Russia. In contrast to swaps traded on exchanges, over-the-counter exchanges are privately negotiated contracts. The parties to these transactions almost always rely on model contracts published by trade associations such as International Swaps and Derivative Association. The legal nature of swaps has become a subject of debate, as the contractual provisions of swap agreements largely resemble betting contracts, which are unenforceable in many jurisdictions. However, available case law shows that whenever a party to a swap agreement seeks to hedge its existing risks by entering into a swap transaction, state courts can enforce it. Generally, swap litigation is rare. However, it has attracted considerable attention from market participants and academics due to the use of standardized documentation and the impact that individual court decisions can have on the market as a whole. Russian courts have ruled on several disputes involving various swap transactions. The first litigation concerned an interest rate swap and gaps in the contractual documentation that allowed one party to terminate the swap agreement unilaterally. Other cases concern more complex financial products such as cross-currency interest rate swaps and commodity swaps. In recent years, there has been an increase in disputes over contractual obligations related to swap termination agreements between Western and Russian financial institutions. However, these do not concern the legal nature of the swaps themselves. Rather, Russian courts have to deal with the inability to make or receive payments in the face of unilateral sanctions imposed by foreign states against Russian counterparties to swap agreements. Although the concept of swaps originated in Anglo-Saxon countries, legal scholars from civil law jurisdictions have taken an interest in swap agreements. They have analyzed swaps based on contract law doctrine and compared them to the sale and purchase and barter contracts enshrined in their civil codes. From a Russian legal perspective, swap agreements should be treated differently depending on the manner in which the obligations arising from such agreements are performed. While non-deliverable swaps should be viewed as aleatory contracts, deliverable swaps are exchange contracts that create mutual obligations that are not based on an unknown future event to the parties to the contract.