19 March 2020
Coronavirus and force majeure: fulfillment of contractual obligations in a pandemic

As the pandemic spreads, and states adopt restrictive measures, companies will become unable to fulfill their contractual obligations.  Under such circumstances, applicability of force majeure rules in each case becomes of paramount importance.

It is important to make correct legal qualification from the very outset, and to take all the necessary steps in order to subsequently be able to refer to force majeure, including the collection of evidence in case of a subsequent dispute.

1. The spread of coronavirus infection 2019-nCoV (COVID -19) as a force majeure circumstance (force majeure)

By the Decree of the Moscow Mayor dated 05.03.2020 No. 12-UM “On the introduction of a high alert”, supplemented by the Decrees of the Mayor of Moscow dated 14.03.2020 No. 20-UM and dated 16.03.2020 No. 21-UM, a high alert regime was introduced on the territory of the city of Moscow. At the same time, the Decree of the Moscow Mayor specifies that the spread of 2019-nCoV (COVID-19) is an extraordinary and inevitable circumstance that entailed the introduction of a high-availability mode.

It raises a question of the possibility of qualifying the fact of the spread of coronavirus infection and the introduction of related restrictive measures as a force majeure circumstance under paragraph 3 of Art.  401 of the Civil Code of the Russian Federation in the performance of civil obligations.

Within the meaning of Clause 3, Art.  401 of the Civil Code, the court must assess the presence or absence of force majeure circumstances in each case individually, based on the totality of the evidence.  Consequently, the mere announcement by the Moscow Mayor of the spread of coronavirus infection as an emergency does not automatically entail the court to qualify this circumstance as force majeure. However, the Decree of the Moscow Mayor can be considered as key evidence of the occurrence of force majeure by the courts.  When proving the presence of force majeure in disputes with foreign trade transactions, the certificate of force majeure of the Russian Chamber of Commerce and Industry will be of significant importance.

2. Effect of coronavirus infection 2019-nCoV (COVID-19) on previously concluded agreements

The aforementioned paragraph 3 of Art. 401 of the Civil Code of the Russian Federation addresses the issue of non-performance or improper performance of an obligation due to force majeure only in relation to liability.  The issue of termination of the contract in such a situation should be considered separately, however, it is no less important, since only in case of termination of the contract the company will be able, for example, to demand the return of the previously made prepayment. The following options are possible.

  • Termination of an obligation because of the impossibility of its fulfillment (Art. 416, 417 of the Civil Code of the Russian Federation)

An obligation is terminated if it cannot be actually fulfilled (Art. 416 of the Civil Code of the Russian Federation) or if its fulfillment will be contradict any government act (Art. 417 of the Civil Code of the Russian Federation).

Art. 416 of the Civil Code of the Russian Federation regulates the actual impossibility of fulfillment and establishes that in the event of its occurrence the obligation terminates automatically.  Moreover, as a rule it is important, that the actual impossibility of execution remains constant, i.e.  one in which obstacles to execution will remain in place in the future.  The actual impossibility of enforcement resulting from the introduction of restrictive measures in connection with the threat of the spread of coronavirus infection will not meet this criterion in most cases, since restrictive measures are clearly temporary. Accordingly, there is a risk that references to the termination of the obligation due to the actual impossibility of its performance will be rejected.

If the parties are faced with legal impossibility to fulfill an obligation, (Art. 417 of the Civil Code of the Russian Federation), the obligation shall terminate regardless of whether such impossibility is temporary or permanent.  In this regard, we believe that if, due to the introduction of restrictive measures, the execution of the contract is objectively impossible, the party to the contract has the right to refer to the fact of termination of the obligation on the basis of Art. 417 of the Civil Code of the Russian Federation due to the legal impossibility of its implementation.

  • Change or termination of the contract in connection with a significant change in circumstances (Art. 451 of the Civil Code of the Russian Federation)

Under the conditions for the introduction of various quarantine measures, a party to a contract has the right to apply to the court with a request to amend or terminate the contract due to a significant change in circumstances (Art. 451 of the Civil Code of the Russian Federation).

There is very little positive practice for terminating, and even more so amending the contract on the basis of this article, since it provides for rather stringent conditions for its application.  However, in our opinion, this practice will gradually begin to take shape given the spread of the pandemic.

3. Practical recommendations

Consider the following advice if your company is facing difficulties in fulfilling contractual obligations:

  • If restrictive measures introduced by state bodies due to the spread of coronavirus impede the fulfillment of the contract, it is necessary to notify the counterparty of the occurrence of force majeure event. In this case, attention should be paid to the contractual provisions: (1) the time period within which the counterparty must be notified of the occurrence of a force majeure event;  (2) requirements as to the content of such a notice;  (3) requirements as to the documents that must confirm the occurrence of force majeure;  (4) contractual consequences of non-compliance with these requirements.
  • The validity of the termination of the contract should be assessed due to the impossibility of execution (Art. 416, 417 of the Civil Code of the Russian Federation) and, if there are appropriate grounds, notify the counterparty of the termination of the contract.  Another option for protecting the interests of a party to a contract that cannot fulfill its obligations under various quarantine measures may be to appeal to the court with a request to amend or terminate the contract due to a significant change in circumstances (Art. 451 of the Civil Code of the Russian Federation).

When entering into new contracts, particular attention should be paid to the sections on force majeure, liability and contract waivers.  Note that a force majeure event can only be recognized as such where its  occurrence could not have been foreseen by the parties at the time of entering the contract.  Therefore, if when eetering into a contract there is a risk of non-performance of certain obligations due to the restrictive measures taken by the state in relation to the pandemic, it is advisable to explicitly provide for additional liability restrictions.  In addition, it is important to formulate the terms of new agreements in such a way, as to give the parties the option to withdraw from the contractual relationship or change the terms of the agreement in the event of any obstacles associated with the newly introduced restrictions, as well as to regulate in detail the consequences of such a withdrawal.

Practices

Key contacts

Oleg Bouiko

Oleg Bouiko

Moscow

Denis Arkhipov

Denis Arkhipov

Limassol, Moscow

Elena Agaeva

Elena Agaeva

St. Petersburg