The coronavirus of obligations
The coronavirus pandemic is an emergency event whose nature is exceptional and goes beyond the norm. First it is necessary to assess whether the coronavirus pandemic influences a specific company’s performance of its obligations under a specific contract, since the mere fact of the pandemic does not release all the parties to civil relationships from liability for the non-performance or improper performance of obligations. For example, the coronavirus pandemic has significant impact on a company’s ability to perform its obligations with respect to supply, if:
This provision of the law is discretionary. For this reason the contents of the contract are important, since the parties are entitled to agree to amend the grounds for liability, and provide for other consequences of a force majeure event or to exclude the application of the rules concerning force majeure. But the court may invalidate such provision of the contract taking into account the specific circumstances of the case and under articles 10 and 428 of the Russian Civil Code. Also, as a rule, the parties establish a procedure for the actions that need to be taken when a force majeure event happens.
The set of documents. The set of documents will vary depending on whether the transaction is a foreign trade transaction or a domestic one. In order to confirm that a force majeure event has occurred with respect to events that happened in the Russian Federation, a party to a foreign trade transaction has a right to apply to the Chamber of Commerce and Industry of the Russian Federation to obtain a force majeure certificate.
If restrictive measures taken in order to prevent the spread of the coronavirus and preventing the party to the contract or its contracting party from performing its obligations have been taken in a foreign country, then the certificate of the authorised body of the corresponding country will be the proper document confirming the occurrence of the force majeure circumstances.
Notification of contracting parties. If you fail to perform this obligation, then you will need to recover losses caused to creditors by this (clause 10 of Resolution No. 7 of the Plenum of the Supreme Court dated 24 March 2016 “On the application by courts of certain provisions of the Russian Civil Code concerning liability for a breach of obligations”). The contract may provide for limited timeframes for the performance of this obligation, and for more severe consequences for a failure to perform it (up to a prohibition on relying on force majeure circumstances).
Follow the instructions provided for by the contract with respect to force majeure event, and if possible take all reasonable measures to mitigate the damage caused to the other party to the transaction. Otherwise the creditor has increased chances of recovering losses and fines provided for by the contract in court proceedings from the party which improperly performed its obligations.
Case law. The pandemic has already become the reason for a downturn of world markets. But a decrease of demand for goods and services, a change in currency exchange rates and a worsening in the economic condition of a party to a transaction cannot in themselves be recognised as force majeure events owing to the risky nature of the business activity. There is already developed case law in accordance with which a change of the currency exchange rate (ruling No. 1076-O of the Russian Constitutional Court dated 26 May 2016 КС), a financial crisis (resolution No. 4876/01 of the Presidium of the Russian Supreme Commercial Court dated 7 August 2001), inflation processes (resolution No. 1074/10 of the Presidium of the Russian Supreme Commercial Court dated 13 April 2010 in case No. А40-90259/08-28), and the worsened financial standing of a party to a transaction (resolution No. 9600/10 of the Presidium of the Russian Supreme Commercial Court dated 30 November 2010 in case No. А17-1960/2009; resolution No. F07-13100/2019 of the State Commercial Court for the North-Western Circuit dated 28 October 2019 in case No. А56-51762/2018) are not recognised as a significant change of circumstances, and, consequently, the hopes invested in the court may fall short.
In one of the latest cases the court critically assessed the reliance of a party to a dispute on the impossibility to provide the court with evidence on the case owing to the fact that the company’s CEO was outside the Russian Federation and owing to the coronavirus epidemic (decision of the State Commercial Court of Tver Region dated 13 February 2020 in case No. А66-17378/2019). Since in connection with the spread of the epidemic courts are not working until 13 April 2020, similar cases the settlement of which could already have been expected will be settled after the middle of April 2020.
Now and afterwards. Now the negotiation process with contracting parties has crucial importance. It is necessary not only to give notice of the occurrence of unexpected circumstances, but also to interact with regard to determining further actions aimed at mitigating the losses of both parties and the possibility of amending contracts. It is also necessary to clearly document evidence of the occurrence of force majeure circumstances and their influence on the performance of obligations under the contract. You need to comply with all the specific procedural aspects provided for by the contract and not to forget that contracting parties also need to be notified when the force majeure circumstances cease to have effect. And it is important not only to perform contracts that have already been entered into, but also to correctly determine the terms and conditions of contracts into which parties are currently entering. Those involved in civil relationships should develop special contractual terms concerning the risks associated with the spread of the coronavirus which provide for the specifics of interaction of the parties, the necessary evidence, and the procedure for amending or terminating the contract if certain circumstances occur, and to assess whether it is permissible and reasonable to include in the contract conditions for the recovery by a party of property losses (article 406.1 of the Russian Civil Code) etc.
- the company is to supply specific products which are produced only in China and currently their production has been terminated owing to the coronavirus pandemic, and
- this company cannot supply products within the agreed timeframes since the products have not been produced yet at the plant in China, and
- at the same time there are no similar products or there are but they cost significantly more.
The party is released from liability if the proper performance of the obligation became impossible as a result of force majeure circumstances, i.e. circumstances that were extraordinary and unavoidable in the given conditions. Such circumstances exclude:
- a breach of obligations by contracting parties of a debtor,
- products that are required for performance being unavailable on the market,
- the debtor not having the required funds (article 401(3) of the Russian Civil Code).
This provision of the law is discretionary. For this reason the contents of the contract are important, since the parties are entitled to agree to amend the grounds for liability, and provide for other consequences of a force majeure event or to exclude the application of the rules concerning force majeure. But the court may invalidate such provision of the contract taking into account the specific circumstances of the case and under articles 10 and 428 of the Russian Civil Code. Also, as a rule, the parties establish a procedure for the actions that need to be taken when a force majeure event happens.
The set of documents. The set of documents will vary depending on whether the transaction is a foreign trade transaction or a domestic one. In order to confirm that a force majeure event has occurred with respect to events that happened in the Russian Federation, a party to a foreign trade transaction has a right to apply to the Chamber of Commerce and Industry of the Russian Federation to obtain a force majeure certificate.
If restrictive measures taken in order to prevent the spread of the coronavirus and preventing the party to the contract or its contracting party from performing its obligations have been taken in a foreign country, then the certificate of the authorised body of the corresponding country will be the proper document confirming the occurrence of the force majeure circumstances.
Notification of contracting parties. If you fail to perform this obligation, then you will need to recover losses caused to creditors by this (clause 10 of Resolution No. 7 of the Plenum of the Supreme Court dated 24 March 2016 “On the application by courts of certain provisions of the Russian Civil Code concerning liability for a breach of obligations”). The contract may provide for limited timeframes for the performance of this obligation, and for more severe consequences for a failure to perform it (up to a prohibition on relying on force majeure circumstances).
Follow the instructions provided for by the contract with respect to force majeure event, and if possible take all reasonable measures to mitigate the damage caused to the other party to the transaction. Otherwise the creditor has increased chances of recovering losses and fines provided for by the contract in court proceedings from the party which improperly performed its obligations.
Case law. The pandemic has already become the reason for a downturn of world markets. But a decrease of demand for goods and services, a change in currency exchange rates and a worsening in the economic condition of a party to a transaction cannot in themselves be recognised as force majeure events owing to the risky nature of the business activity. There is already developed case law in accordance with which a change of the currency exchange rate (ruling No. 1076-O of the Russian Constitutional Court dated 26 May 2016 КС), a financial crisis (resolution No. 4876/01 of the Presidium of the Russian Supreme Commercial Court dated 7 August 2001), inflation processes (resolution No. 1074/10 of the Presidium of the Russian Supreme Commercial Court dated 13 April 2010 in case No. А40-90259/08-28), and the worsened financial standing of a party to a transaction (resolution No. 9600/10 of the Presidium of the Russian Supreme Commercial Court dated 30 November 2010 in case No. А17-1960/2009; resolution No. F07-13100/2019 of the State Commercial Court for the North-Western Circuit dated 28 October 2019 in case No. А56-51762/2018) are not recognised as a significant change of circumstances, and, consequently, the hopes invested in the court may fall short.
In one of the latest cases the court critically assessed the reliance of a party to a dispute on the impossibility to provide the court with evidence on the case owing to the fact that the company’s CEO was outside the Russian Federation and owing to the coronavirus epidemic (decision of the State Commercial Court of Tver Region dated 13 February 2020 in case No. А66-17378/2019). Since in connection with the spread of the epidemic courts are not working until 13 April 2020, similar cases the settlement of which could already have been expected will be settled after the middle of April 2020.
Now and afterwards. Now the negotiation process with contracting parties has crucial importance. It is necessary not only to give notice of the occurrence of unexpected circumstances, but also to interact with regard to determining further actions aimed at mitigating the losses of both parties and the possibility of amending contracts. It is also necessary to clearly document evidence of the occurrence of force majeure circumstances and their influence on the performance of obligations under the contract. You need to comply with all the specific procedural aspects provided for by the contract and not to forget that contracting parties also need to be notified when the force majeure circumstances cease to have effect. And it is important not only to perform contracts that have already been entered into, but also to correctly determine the terms and conditions of contracts into which parties are currently entering. Those involved in civil relationships should develop special contractual terms concerning the risks associated with the spread of the coronavirus which provide for the specifics of interaction of the parties, the necessary evidence, and the procedure for amending or terminating the contract if certain circumstances occur, and to assess whether it is permissible and reasonable to include in the contract conditions for the recovery by a party of property losses (article 406.1 of the Russian Civil Code) etc.