The Russian Supreme Court has provided explanations on individual issues of the application of civil legislation associated with the consequences of the COVID-19 pandemic

On 21 April 2020 the Praesidium of the Russian Supreme Court approved Review No. 1 of individual issues of case law associated with the application of legislation and measures to prevent the spread of the new coronavirus infection (COVID-19) in the Russian Federation.

In the areas of procedural and civil legislation, special focus should be placed on the individual explanations specified below.

I. Issues of the application of civil legislation

1. Timeframes for the performance of obligations and limitation periods

The Russian Supreme Court (the “Supreme Court”) specifies that the timeframes and the rules for calculating them (in particular, the rules applicable in the event the last day of a specified timeframe is a non-working day (article 193 of the Russian Civil Code) set out in civil legislation should apply taking into account the definition of the terms “non-working day” and “public holiday” for which labour legislation provides (articles 111 and 112 of the Russian Labour Code).

The non-working days announced by the Russian President's Orders No. 206 dated 25 March 2020 and No. 239 dated 2 April 2020 are measures aimed at preventing the spread of the infection and may not be treated as non-working days in the meaning in which this term is used in the Russian Civil Code (the “Civil Code”).

Entrepreneurs should check whether the existing agreements contain provisions that any obligations in dispute may be performed by the debtor specifically (or among other things) on a non-working day or on a public holiday. In such a case the rules of article 193 of the Civil Code that the timeframes should be extended to the next working day do not apply.

The Supreme Court has also pointed out that actually the introduction of the regime of “non-working days” was not universal in its nature and was conditional upon a number of circumstances (the nature of an enterprise’s activity and its location and whether a specific constituent entity has introduced restrictions owing to the high-alert regime). Therefore, in a number of cases the announced “non-working days” have not and could not have created any obstacles for debtors to perform their obligations, which is sure to be taken into account by the courts in considering disputes.

Therefore, the fact in itself that the President's Orders have announced the introduction of “non-working days” for the period between 30 March 2020 and 30 April 2020 is not a ground for shifting the timeframe for the performance of obligations in accordance with the procedure set out in article 193 of the Civil Code, or for suspending the limitation period in the absence of the grounds set out in article 202 of the Civil Code.

The issues with respect to restoring or suspending limitation periods owing to the restrictions should also be approached on an individual basis in each specific case (the way such issues will be settled will primarily depend on how the courts will treat the circumstances the claimant refers to in order to justify the suspension of the limitation period: whether the courts will classify such circumstances as a force-majeure, or will recognise them as a valid reason for missing the limitation period).

In other words, if the measures taken by the state authorities to prevent the spread of the coronavirus infection are recognised as force-majeure circumstances preventing the filing of a claim with the court (which also has to be proven by the claimant), the limitation period may be suspended.

In other cases one can try to file an application with the court to restore the limitation period, since it has been missed for a valid reason. According to the clarifications of the Supreme Court, in the current situation the following reasons may be treated as valid:

• there was no way to file a claim because of the self-isolation regime;
• filing an application with the court online or by mail was not possible owing to age or health condition.

2. Recognising the pandemic and the restrictions as force-majeure circumstances

With respect to the crucial issue of whether the circumstances relating to the coronavirus pandemic (i.e. the epidemiological situation, the restrictions and the self-isolation regime) may be recognised as force-majeure circumstances, the Supreme Court clarifies that the above circumstances may not be universally recognised in this way for all categories of debtors, and that the type of and the conditions for carrying out the activity, such as the region, the timeframes for the performance of the obligation, the nature of the outstanding obligation and the extent to which the debtor is acting in good faith and reasonably, must be taken into account.

Further to this point, the Supreme Court issued a reminder that the restrictions caused by the spread of the coronavirus infection may be recognised as force-majeure circumstances if they meet the following criteria: such restrictions are an emergency, they may not be prevented, are external in nature with respect to the debtor’s activity and there is a causal link between such restrictions and the non-performance of the obligation. Besides, the Court emphasises that, in addition to the specified characteristics of force-majeure, there is one more specific feature - the relative nature of such circumstances (i.e. the absence of any opportunity to perform the obligation under the specific agreement is always taken into account; a circumstance which may be recognised as force majeure for some contractual relationships automatically ceases to be such in a different situation).

The Supreme Court made an additional important statement that not only may the fact of the pandemic being in place be recognised as a force-majeure circumstance, but so may “circumstances caused by the threat of the spread of the coronavirus infection”. That is to say, force majeure may include the consequences of the pandemic, both external (the measures taken by the state, the publishing of the relevant items of legislation, the introduction of bans and limitations on the movement of individuals and transportation vehicles, a suspension of companies’ activities, etc.), and internal, for example, a significant reduction in the revenues of a specific entrepreneur resulting from the restrictions that are introduced, provided that a causal link has been proven. Therefore, the Court has actually admitted the possibility of extending the standard of proof with respect to the causal link (i.e. account may be taken not only of the circumstances which contribute to there being a direct, unambiguous and close link between the onset of the pandemic and the debtor being unable to perform a specific obligation, but also of more indirect and distant factors that have ultimately caused the delay).

Also important is the clarification that, if a debtor lacks money as a result of the restrictions, this circumstance may also be recognised as force majeure, provided that the lack of money has resulted specifically from such restrictions.

Previously court practice did not recognise financial difficulties (the lack of money, an economic crisis and the like) as a force majeure for the purposes of article 401 of the Civil Code. Now, according to the Court’s clarifications, such interpretation of the provision in article 401 of the Civil Code is applied in accordance with the general rule to which exclusions may be allowed in specific cases.

However, taking into account that such financial difficulties may be classified as force-majeure circumstances if there is a proof that there exists a causal link between such difficulties and the pandemic or the restrictions, which is a highly subjective and judgement-based circumstance to be proven, it may be fairly difficult to apply this clarification in practice (if judges use a formal approach), and bad-faith counterparties who have violated their obligations will seek to avoid liability referring to this clarification.

Although the above clarifications are useful to a certain extent, the Supreme Court has, nevertheless, left unanswered one of the crucial issues that most entrepreneurs face in the current situation. The issue is: whether the concept of force majeure may be applied by entities “in sequence” and whether an entity may treat a delay on the part of its debtor caused by force majeure as a ground for justifying its own delay. In the current situation entrepreneurs are expected to try using the concept of a “multifaceted” force majeure as a defence strategy. However, we believe that, unfortunately, such claims will be upheld only in exceptional cases and the courts will maintain a conservative position in this event.

The Supreme Court has also clarified the facts to be proven in the event of the force-majeure concept being applied. In addition to the presence of force-majeure circumstances and their duration along with there being a causal link, a claimant will have to prove that it was not involved in the onset of the force-majeure event and that it has behaved in good faith, which includes taking measures to prevent (to mitigate) potential risks.

The clarifications also allow certificates or other documents issued by competent authorities and organisations (such as a Chamber of Commerce and Industry) to be provided as proof that force-majeure circumstances are present. Nevertheless, please note that such documents in themselves do not have any predetermined force for the courts, since classifying circumstances as force majeure is an exclusive prerogative of the courts. However, such documents may be helpful in the event that the good-faith conduct of the claimant is to be proven (which is most relevant when under an agreement the parties have undertaken to have recourse to such bodies in the event of force majeure).

In its clarifications the Supreme Court has also set out that the debtor is provided with a reasonable timeframe for performing its obligation if the creditor has not withdrawn from the agreement owing to a loss of interest after the force majeure ceases to exist.

3. Termination of obligations on the grounds of article 416 or 417 of the Civil Code

The Supreme Court has clarified that the above articles are applicable in the event of a full or partial impossibility to perform obligations which is objective and permanent in nature (cannot be cured).

In this case the Supreme Court points out the permanent nature of the impossibility of performance, which is a condition for the provisions of articles 416 and 417 of the Civil Code to apply. By way of an example, such “unceasing” impossibility includes situations when an individually defined item is lost as a result of the onset of the relevant circumstances or when harm is inflicted on the service provider (for instance, in the creative sphere) preventing it from performing its obligations personally. Please be reminded that article 416 of the Civil Code, which is dedicated to the termination of obligations owing to the actual impossibility of performance, does not make any reference to the nature of such impossibility. That is, the above article does not determine whether the impossibility should exist on a permanent or temporary basis for the obligation to be terminated under this article.

Please note that in the event of a legal impossibility to perform the obligation (article 417 of the Civil Code), which is caused by the state authorities publishing items of legislation, such impossibility of performance is presumed to be temporary in nature (i.e. until the item of legislation of the state authority is repealed).

Therefore, before filing a claim with the court please consider analysing and assessing the nature of the impossibility of performance in connection with the circumstances that have occurred. This includes determining whether there will ever be a chance to perform the obligation if within the timeframe when the obligation is in force, the circumstances that have caused the impossibility of performance cease to exist. If the impossibility of performance turns out to be temporary and, after the obstacles to performance cease to exist, the deadline for the obligation has not yet expired, we believe that it is highly unlikely that article 416 and, in particular, article 417 of the Civil Code will be successfully applied in court.

4. Recognising the pandemic and the restrictions as a material change in the situation for the purposes of article 451 of the Civil Code

In fact the Supreme Court has not provided any clarifications that could help the courts (and parties to an agreement) to classify the pandemic and the restrictions as a material change in the circumstances for the purposes of article 451 of the Civil Code. The Supreme Court has listed only general approaches.

Besides, the Supreme Court has issued a reminder that the provisions of article 451 of the Civil Code are discretionary in nature and are applicable to the extent that the agreement does not provide otherwise. Therefore, we recommend that before filing with the court a claim to terminate the agreement owing to a material change in the circumstances, a review of the agreement should be carried out to check whether it contains any provisions blocking the possibility of terminating the agreement on the above grounds.

Neither has the Supreme Court provided any clarifications concerning the possibility, in the existing circumstances, of prioritising the making of amendments to, instead of the termination of, the agreement, since the change in the situation has resulted from a circumstance which is definitely an emergency and has never occurred before. This may make negotiations between the counterparties more complicated.

The Supreme Court’s Review does not address the crucial issue of whether a court decision may be applied retroactively for the purpose of article 451 of the Civil Code. Neither does it contain any explanations concerning the specific conditions or situations in which the claimant could expect the court to apply the consequences of the termination of an agreement from a certain moment in the past. We believe that the termination of a contractual relationship with the counterparty from the moment when it actually ceases to be economically feasible owing to the change in the situation would allow the debtor under the obligation to restore the balance of interests to the maximum extent. In the current situation, even with a court decision in place to terminate the agreement, in view of the possible timeframes for contesting the agreement, the claimant will actually withdraw form the agreement with a substantial delay. Before this happens, all the obligations under the agreement, including sanctions for violating it, remain in force, which definitely remains the principal issue in the current situation.

Moreover, the Supreme Court was expected to provide more specific information regarding whether article 451 of the Civil Code may be applied and whether the current situation may be classified as a material change in the situation, since Russian courts exercise caution when interfering with contractual relationships between parties. However, in the existing situation it is obvious that the balance of rights and interests of the counterparties may often be established only with the assistance of a third party, i.e. the court, and the approaches that the courts use when they apply article 451 of the Civil Code need to be changed.

The Supreme Court has also emphasised in its clarifications that there are also other institutions of civil law that could be applied with a view to withdrawing from an agreement owing to a counterparty’s violation of its obligations (which is relevant for the current situation). In particular, a party will be able to withdraw from an agreement if its counterparty violates a counter-obligation (regardless of the reasons why the counterparty has delayed its performance, including owing to a force majeure circumstance for the other party) in accordance with article 328(2) of the Civil Code.

What to think about and what to do

The Review of the Supreme Court should be aimed at ensuring the uniform application of legislation and eliminating issues that both the courts and the companies have already faced.

Nevertheless, the Review does not contain any clear criteria that would help most of the existing issues to be unambiguously settled, including whether the pandemic and the restrictions it has caused constitute a force majeure. With regard to each of the contentious issues the Supreme Court points out that the specific features of each situation should be taken into account in the light of the existing approaches to settling the issues that arise.

Probably the only significant clarification is the statement that there is a possibility for financial difficulties resulting from the pandemic and restrictions that have made the performance of obligations impossible to be classified as a force majeure.

It appears that in this connection the practice relating to the application by the courts of the clarifications in the Review will differ to a significant extent. In view of the absence of any clear criteria, the key point will be proving the link between the onset of any circumstances and the measures aimed at limiting the spread of the coronavirus infection.

Pepeliaev Group’s specialists are ready to provide complex legal support in court proceedings in commercial courts and in courts of general jurisdiction of all levels. They will provide advice on any issues arising from the spread of the coronavirus infection and from the restrictions applied.