Coronavirus vs contract

Pepeliaev Group clarifies whether the coronavirus infection may be classified as a force-majeure event in contractual relationships with counterparties.

The sweeping impact of the new coronavirus infection is becoming ever more pronounced with each passing day, and is also interfering with the legal aspects of both domestic and foreign trade relationships.

Owing to the spread of the coronavirus infection the Russian authorities and the governments of other countries are taking measures to restrict the travel of the population and to establish a special regime of commercial activity for enterprises across various sectors of business and industry.

These measures have already affected the activity of Russian and international companies, primarily in the area of performing commercial contracts, whether these have a foreign element or are domestic in nature.

We see that many of our clients are already facing the issues of developing tools and solutions to suspend the performance of commercial contracts, to rule out sanctions for non-performance, to reconsider the conditions or even to withdraw from performing the obligations without running the risk of negative consequences (liability).

We believe that the relevant solutions may be developed based on the legal mechanisms set out in:

1) article 401(3) of the Russian Civil Code (the Civil Code) (force-majeure events) and

2) article 451 of Civil Code (amending or terminating a contract owing to a material change of circumstances).

1. The World Health Organisation has for the first time reported the outbreak of the coronavirus infection on an international level as an emergency situation.

In Russia the coronavirus has been included in the list of dangerous diseases (Resolution No. 66 “On amending the list of dangerous diseases” of the Russian Government dated 31 January 2020, the list having originally been adopted by Resolution No. 715 of the Russian Government dated 1 December 2004). By virtue of article 1(17) of Federal Law No. 52-FZ “On the sanitary and epidemiological safety of the public” dated 30 March 1999, the coronavirus is an epidemic.

The outbreak of the coronavirus has the nature of an emergency situation, i.e. a situation that is exceptional, i.e. going beyond the norm, and cannot be prevented, since any party involved in business performing the same type of activity could not have avoided the occurrence of this circumstance or its consequences.

This event may be recognised as a force-majeure circumstance which, by virtue of article 401(3) of the Civil Code, releases an infringing party from liability for the non-performance of contractual obligations.

According to the mass media, the Russian Chamber of Commerce and Industry is already issuing opinions on force-majeure in connection with the consequences of the coronavirus, yet only with respect to foreign trade and state contracts.

The Russian Chamber of Commerce and Industry is certifying as a force-majeure event not the coronavirus epidemic itself, but the restrictions and other measures the Government is taking in Russia to prevent the spread of the epidemic if such restrictions and other measures prevent a Russian company from performing its contractual obligations to a foreign partner.

Moreover, in accordance with Order No. 20-UM of the Mayor of Moscow dated 14 March 2020 “On amending order No. 12-UM of the Mayor of Moscow dated 5 March 2020”, the spread of the new coronavirus infection (2019-nCoV) is, in the existing conditions, an emergency situation that cannot be prevented and that has resulted in a regime of high alert being introduced under Federal Law No. 68-FZ “On the protection of the public and territories from natural and man-made emergency situations” dated 21 December 1994. Such regime is a force-majeure event.

It is highly likely that this provision has been incorporated into the text of the Order with a view in the existing situation to facilitating the settlement of disputes relating to the non-performance of obligations at least within the Moscow area.

Whether the Order may be applied in other constituent entities of Russia is still an open issue, since this document has restricted geographical effect. However, we believe that the courts of other regions will also refer to this Order.

2. It is worth being reminded that in the current situation of uncertainty with respect to the performance of many obligations, parties may change or restructure such obligations or provide for various options for the situation to evolve and for the obligations to be performed. Current civil legislation offers the parties a wide range of tools for doing so, among them:

• Articles 308.1 and 320 of the Russian Civil Code - an alternative obligation and the performance of an alternative obligation.
• Articles 308.2 and 320.1 of the Russian Civil Code - an optional obligation and the performance of an optional obligation.
• Article 310 of the Russian Civil Code – the opportunity to impose a charge for a unilateral refusal to perform the obligation.
• Article 327.1 of the Russian Civil Code - obligations may be performed and rights under an undertaking may be changed or terminated provided that one of the parties performs actions or that other circumstances set out in the agreement occur.
• Article 406.1 of the Russian Civil Code - an obligation to reimburse property losses can be imposed if such losses do not relate to a violation of an obligation by a party to such obligation.
• Articles 429.2 and 429.3 of the Civil Code - an option for the entry into a contract and an option contract.

What to think about and what to do

Certainly, the issue of whether the coronavirus may be classified as a force-majeure event should be analysed in each individual case with regard to a specific contractual relationship and the contractual terms and conditions governing the procedure under which the parties are cooperating when such events occur.

If the coronavirus can be classified as a force-majeure event in contractual relationships with counterparties, we recommend that, despite the well-known nature of the event and with a view to mitigating the negative consequences, an appropriate notice should be sent to the other party within the timeframes set out in the contracts.

Whether the above tools and mechanisms (or a combination of them) may be used for a contract to be amended or even terminated in each individual case depends on the nature and specific features of the contractual obligation (the terms of the contract).

Help from your adviser

Pepeliaev Group's lawyers are ready to assist in assessing any circumstances and facts as they apply to each specific obligation, developing a position with regard to the most reasonable conduct depending on the situation. We will also provide any other legal support, including in resolving contentious situations, in negotiations with counterparties, and in preparing agreements in the current crisis.

We are also ready to provide complex legal assistance and support during court proceedings, whether in commercial courts and courts of general jurisdiction.