COVID-19 as a force-majeure

Coronavirus is or isn't a force-majeure? In what cases this factor can help business.

The Russian government and regional authorities are taking measures against spreading of a new coronavirus infection, and also measures to support business in this respect.

Thus, by the Decree of Moscow Mayor № 12-УМ as of 05.03.2020 a high alert regime was introduced on the territory of Moscow. It was established that such regime constitutes a force majeure circumstance. Similar acts were adopted in several constituent entities of the Russian Federation.

While the reduction of revenue many entrepreneurs mistakenly consider force majeure as unlimited release of market players from performance of its obligations.

We recommend you to pay attention to important issues, which could prevent you from common mistakes while decisions making in the current situation.

1. Force majeure can release from liability for breach of obligations but not from performance of these obligations.

There is no any indication in the Law saying that in case of force majeure, companies should be released from its obligations. Force majeure can only spare from the consequences of breach of obligations (subsection 3, article 401 of the Russian Civil Code).

For example, in case of force majeure, a company may not pay the penalty for delay in performance of services or provision of works but sooner or later the services/works should be provided to the customer (or money should be returned).

If, after the restrictions and embargos are lifted (force majeure will cease to exist) the company will continue not to perform is obligations under the contract, this company can be prosecuted.

2. Force majeure releases from liability for breach of obligations only in case of direct causal link between such circumstance of insuperable force and such breach.

Measures being taken by the government in respect of high alert regime establishment meet the criteria for force majeure; nevertheless this is not enough for releasing from liability for breach of obligations.

For release from liability, breach of obligations should be caused by unusual (force majeure) circumstances, in this particular case by prohibitive measures.

For example, a company should have organized some event (exhibition, business training, etc.) but could not do this, due the fact that such event is forbidden.

We would like to draw your attention that in case any activity is forbidden, this does not mean that companies doing such activity (working in this sphere) can withhold the payment for goods or services to its suppliers (even if due to business shutdown a company finds itself without revenue).

In this case, force majeure itself doesn’t influence the ability to perform the payment, as accounting transactions are not forbidden. In accordance with the Law the lack of financial resources is not a force majeure (whatever it is caused by).

Therefore, if company makes a decision to stop paying to any of its counterparty, it should be taken into consideration that in future not paying can lead to charging of interest, penalties and other liabilities.

But, even in case, when company has reasons to stop performance of its obligations, we recommend to minimize the damage for partner, including such measure as sending within the shortest period of time a written notice about circumstances that are happening. Otherwise, a company can be charged losses incurred by partner.

In case of no possibility to perform contractual obligations due to force majeure event it is recommended to get a written opinion that a force majeure event is exist under the specific agreement. If such agreement is signed between Russian companies such opinion should be submitted by regional industrial and commercial chamber, and by the Chamber of Commerce and Industry of the Russian Federation in respect of international deals.

3. Rent payments deferral and “repayment holidays” are granted to limited list of companies.

Deferral of rent and loan payments is granted only for those companies which work in fields that suffered most in worsening conditions.

It is also a mistake to think that deferrals start working automatically and due to this stop to pay rent and loan repayments. If a procedure laid down will not be observed a company may be held responsible for breach of obligations in the same way as it would be in normal circumstances.

To get the payment deferral, a company should address in written to a creditor and request changing of the loan agreement or to a landlord with request (statement) to execute additional agreement about rent payments deferral.

In the same way a company should address to landlord with request to reduce an amount of rent payment in case the company wants to use the right provided to relevant fields, to claim for the reduction of rent because of impossibility to use space.

4. The obligations of company can be considered ceased to exist only in case performance of such obligation absolutely impossible, but it is not quite relevant to the current situation.

Civil legislation provides for the termination of obligations if performance of such obligations is impossible among other things due to acts of state authorities (article 416, 417 of the Russian Civil Code).

However, even if performance of any services have become forbidden, it is imprudent for contractor to consider its obligations to be terminated in full. Prohibitive measures are temporary ones and this means that after the high alert regime is annulled the performance of relative obligations will be possible again.

Even in case when performance of obligations is impossible in principal, with high probability the contractor will have to return payment received for services or work (less incurred expenses).

5. There are additional options for business interest protection.

Despite the fact that obligations do not cease to exist in current situation and even if company doesn’t have any grounds to suspend performance of its obligations referring to force majeure, it doesn’t mean that there is no any other option to protect company’s interests.

Firstly, the Law provides the possibility to terminate the agreement in case of significant change of circumstances.

Unless otherwise determined in the agreement, in accordance with article 451 of the Civil Code of the Russian Federation, the interested party is allowed to claim for termination of agreement (in specific cases - changing of agreement) in court, in case of significant change of circumstance which is (1) unforeseen (it should be pointed out that Coronavirus will not be considered as unforeseen by the court if the agreement was signed after the virus started spreading all over the world) and (2) insuperable.

However, in order to demand termination (changing) of the agreement a company should prove that changing of circumstances significantly worsens its condition under the agreement (deprive from high proportion of benefits and etc.).

For example, such case can take place with a company, which rented a place for mass event before such events became forbidden.

Taking into consideration the court procedure of agreement termination, unilateral notification of the partner is not sufficient for using this remedy. But it will be also a mistake to file a lawsuit without pre-court filing.

A written request to terminate agreement should be sent to a partner, and only in case of denial from partner or failing to receive any response, a company can apply to court. Otherwise, with high probability, the statement claim will be dismissed without hearing on the merits and the company will be forced to file a lawsuit again having lost a lot of time.

Secondly, if a partner is not performing (or obviously will not perform) its obligations, a company can suspend counter-performance of obligations form its side.

Such remedy is created by article 328 of the Civil Code of the Russian Federation but can be used unless the agreement states otherwise.

Например, компания арендует офис в торговом центре, который закрыт в связи с установленными запретами. Тот факт, что арендодатель не сможет исполнить своё обязательство и предоставить арендатору возможность пользоваться помещением (и даже дать доступ в помещение), может быть использован арендатором как основание не вносить арендную плату или отказаться от аренды.

For example, a company rented an office in the shopping mall, which is closed due to prohibitions established. The fact that the landlord cannot perform its obligation and provide the tenant with opportunity to use the office (and even provide the access to the building), can be used by tenant as a ground not to pay the rent or refuse from renting.

In case of suspension of performance of obligations it is recommended and in case of repudiation of a contract it is required to notify the counterparty.

With pleasure we will make clarification of your specific cases of performance/nonperformance of contractual obligations; give and explanation of issues relating to high alert regime regulation in other regions of the Russian Federation and advise on getting opinions on force majeure circumstances from the Chamber of Commerce and Industry of the Russian Federation.