On April 21, 2020 SCHNEIDER GROUP organized a joint webinar on a hot topic—if coronavirus can be considered as Force Majeure. We collected the most popular questions from our participants concerning this issue. Our experts from Russia, Armenia, Kazakhstan, Ukraine, and Belarus give you their answers to these questions.
Question 1: Does COVID-19 automatically release a party from performance of obligations?
In the opinion of the Supreme Court of Russia as of April 21, 2020, the existence of Force Majeure should be established individually and not automatically, taking into account the circumstances of each particular case (including the term of performance of the obligation, the nature of the unfulfilled obligation, reasonableness and good faith of the debtor’s actions, etc.).
Generally, courts do not recognize the debtor’s lack of funds as a basis for exemption from liability, but the Supreme Court noted that in case such lack is caused by the established restrictive measures, e.g. prohibition of certain activities, establishment of the self-isolation regime, etc., – it can be a basis for exemption from liability.
Under the legislation of Armenia and previous interpretation of the Cassation Court, Force Majeure is extraordinary and inevitable circumstances that are objectively insurmountable.
Moreover, Force Majeure is evaluated on case by case basis, with reference to the nature of obligation in question and within the context and scope of the conditions on performance.
It is interesting that in the recent amendment to the Labour code of Armenia to mitigate the consequences of COVID-19, the definition of Force Majeure in labour relations has been changed:
- Force majeure occurs where performance of work duties (including remote work) is impossible due to temporary limitations in rights and freedoms of natural persons and legal entities defined by the law or a decree of a state body during prevention of natural disasters, technological accidents, epidemics, accidents, fires, other circumstances of extraordinary nature or mitigation of the consequences thereof.
This provision should be treated with caution, since the work duties (including remote work) must be totally impossible due to the given extraordinary and inevitable and objectively insurmountable circumstances.
COVID-19 is not considered Force Majeure that automatically releases the party from obligation to properly fulfill performance under the agreement.
The following actions help to minimize business risks and failure of operations:
- Notify the counterparty about difficulties in proper performance of obligations due to Force Majeure
- Propose suspending performance of obligations that are affected due to COVID-19
- Obtain the certificate confirming Force Majeure from the Kazakhstan Chamber of Commerce
However, if the counterparty does not accept COVID-19 as Force Majeure, the company should be prepared to justify such circumstances in court.
According to the Law of Ukraine No. 530-IX dated 17.03.2020, quarantine introduced by the Cabinet of Ministers of Ukraine can be recognized as a Force Majeure event which can be used as a ground for release of the party affected from liability for non-performance of its contractual obligation. At the same time release from liability for non-performance of obligation does not mean its automatic cancellation – in most cases the defaulting party will have to fulfil the obligation later, after the end of Force Majeure events.
In order to be released from performance of obligations, the party suffering from Force Majeure events will have to agree with the counterparty to amend the conditions of their agreement by signing a respective supplementary agreement.
- According to the legislation, COVID-19 is not Force Majeure, but the concrete and formalized restrictive measures taken to prevent spread of infection (the border closing, goods export restrictions, etc.) can be considered as a Force Majeure event
- Confirmation of Force Majeure circumstances does not create the possibility for a contracting party not to perform obligations, but only releases from liability for non-performance or improper performance of the contractual undertakings for the period of Force Majeure
- Changes in currency rates, delayed supply of goods due to customs checks, and lack of sufficient funds do not release the party from due performance of the contract
Question 2. What to do with COVID-19 in business relationships?
We advise you to take the following steps to minimize the risks:
- Keep in touch with your contractual partner
- Aim at reaching agreements through discussions
- Amend contracts by written agreement
To avoid delays in the performance of your company’s duties caused by an absence of the general director (either due to COVID-19 circumstances or another reason) one or more additional directors may be appointed.
When concluding new agreements, keep in mind that you can not refer to COVID-19 as Force Majeure as difficulties now are predictable. We recommend describing circumstances relevant to performance of obligations and possible hindrances in detail.
Should you face problems due to COVID-19 and in case you are going to rely on it, be ready to justify and satisfy the requirements under the Force Majeure test. Collect as much proof and justification as you can, in case you think you will not be able to perform your obligations due to the COVID-19 pandemic. Remember, it is not enough that the contract has simply become more difficult or expensive for one party. We recommend the following:
- Revising the contracts with regards to Force Majeure clause availability therein
- Listing the obligations impossible to perform due to COVID-19 pandemic
- Paying special attention to contracts governed by English law
- Informing partners about difficulties related to performance of obligations because of COVID-19
Proposing to suspend the contractual obligations, terminate them, or come to an agreement
The company should consider the following to assess risks and maintain business relationships:
- Review provision of agreements that would allow to apply Force Majeure
- Check direct link between failure to properly perform an obligation and the effect of COVID -19
- List the obligations that resulted in failure to perform obligations due to COVID-19 pandemic
Regarding contracts concluded before COVID-19 events took place, we recommend the following:
- To check the agreements in place and assess the probability of fulfilling your obligations
- In case of risk of non-performance – to immediately contact the counterparty to find a mutually beneficial solution
- Consider requesting a certificate from the Ukrainian Chamber of Commerce and Industry confirming Force Majeure circumstances
Regarding future contracts, all the current and potential quarantine restrictions have to be taken into account in order to avoid potential non-performance.
Should you believe that coronavirus might potentially affect your contractual covenants, consider the following general recommendations:
- Amend the contracts for the so-called coronavirus related provisions. The more detailed the case related clause is in the contract, the higher level of protection it provides to the party relying on coronavirus as Force Majeure
- Notify business partners on performance related difficulties
- Agree with business partners on extension of fulfilment of contractual covenants
- Assess and take all required measures to reduce potential losses caused to other party by Force Majeure events
- Gather evidence on Force Majeure and your completion of other related actions (took measures to reduce the risks, etc.)
- Develop an action plan (relating to each business partner relationship with which is being affected by Force Majeure events)
- Be ready to justify and satisfy requirements for coronavirus under the Force Majeure test in case you or your counterparty is going to rely on it.