Searching for force majeure…
The introduction of restrictive measures in a number of regions of the Russian Federation aimed at preventing the spread of the new virus caused numerous difficulties related to the inability of the parties to perform their obligations, disruption of events, delivery terms, etc.
The possibility of recognizing certain circumstances as force majeure depends on the specific terms of concluded agreements, as well as on a cause-and-effect link between the circumstances that occurred (the cause) and the inability to perform contractual obligations (the effect).
Let us try to explore this issue in more detail.
What is force majeure?
Force majeure means extraordinary and unavoidable under the current conditions circumstances that made it impossible to perform obligations.
Extraordinariness refers to exclusivity, going beyond “normal” or ordinary, emergency nature for certain living conditions, something that does not classify as a life risk and cannot be taken into account under any circumstances.
Unavoidability means that any participant of the civil commerce carrying out similar activities with the debtor could not have avoided the occurrence of this circumstance or its consequences.
The extraordinary nature of force majeure prevents any fact of life from being qualified as such, but it differs from an event in that it is based on objective, rather than subjective unavoidability.
What does not qualify as force majeure?
Circumstances the occurrence whereof depended on the will or actions of the party to the obligation are not recognized as force majeure, including1:
- Debtor’s lack of required funds;
- Lack of necessary products in the market;
- Breach of an obligation by a counterparty;
- Illegal actions of the debtor’s representative;
- Financial and economic crisis2;
- Illegal actions of third parties (theft, arson, deliberate damage to other people’s property, etc.)3;
- Loss or damage of cargo as a result of fire during its transportation by a professional carrier, theft of cargo by third parties4;
- Revocation of the bank license5;
- Change in the exchange rate, devaluation of the national currency6;
- Bankruptcy of the creditor’s counterparty7.
For the most part, courts classify the said circumstances as business risks. And even if some of the circumstances above are classified in the contract by the parties as force majeure, there is no ironclad guarantee that it will be recognized as such by the court. In each case, the court will investigate whether the circumstance was extraordinary and unavoidable, whether the debtor could have done something to prevent adverse consequences (e.g. deliberate arson could have been avoided by improving the security; lightning strikes and subsequent fire – by installing a lightning rod, etc.).
What may be classified as force majeure?
The following may be classified as force majeure: natural emergencies (stormy weather8; flood that caused the introduction of an emergency regime9; abnormal atmospheric precipitation10), public events and natural disasters11 (earthquake, flood, hurricane), fire, mass diseases (epidemics), strikes, military actions, terrorist acts, sabotages, restrictions on transportation, state bans, prohibition of trade operations and other circumstances beyond the control of the parties to the agreement (contract).
What are the consequences of recognition of circumstances as force majeure?
As a rule, a person that failed to perform or improperly performed an obligation due to force majeure shall be released from liability for its non-performance (improper performance).
Here it should be understood that force majeure does not cancel the obligation itself, but only releases from liability for its non-performance. For example, the lessee may be exempt from a penalty charged for the violation of rent payment terms, but is not exempt from the obligation to pay rent. Similarly, the supplier is not exempt from an obligation to deliver goods, and the buyer is not exempt from an obligation to pay for it.
Is it possible for a pandemic to be recognized as force majeure?
As mentioned above, epidemics and mass diseases may be classified as force majeure.
However, it should be noted that in most cases it is not the pandemic itself that is classified as force majeure, but rather its consequences in the form of restrictive measures.
Thus, the introduction of restrictive measures to stop the spread of the new virus has already been recognized as extraordinary, unforeseeable, unavoidable, beyond the control of the parties and having a significant effect on the performance of obligations under economic agreements of different bodies and institutions, including the Chamber of Commerce and Industry of the Russian Federation, Federal Antimonopoly Service, Ministry of Finance12. Some local regulatory enactments that impose restrictions also classify the circumstances as extraordinary and unavoidable.
At the same time, it should be noted that the fact that such circumstances are recognized as force majeure does not automatically allow applying provisions on force majeure to all contractual obligations.
According to the explanations of the Supreme Court of the Russian Federation, the recognition of the new virus spread as force majeure shall not be equally applicable to all categories of debtors, regardless of the type of their activities, terms of their conduct, including the region in which the organization operates, therefore, force majeure shall be determined taking into account circumstances of a particular case (including the period of performance of the obligation, the nature of a non-performed obligation, common sense and bona fide actions of the debtor, etc.).
Circumstances caused by the threat of the new virus spread, as well as measures taken to prevent its spreading (including introduction of mandatory rules of conduct during the high alert or emergency regime, ban on movement of vehicles, travel restriction for individuals, suspension of activities for enterprises and institutions, cancellation and postponement of events, introduction of the lockdown regime for the citizens, etc.) may be recognized as force majeure in case they comply with the above criteria and there is a confirmed cause-and-effect link between such circumstances and non-performance of obligations13.
What are the conditions for the release from liability?
In view of the above, in order to be released from liability for non-performance of obligations, a party shall prove the existence of the following conditions:
- The fact of force majeure and its duration;
- A cause-and-effect link between force majeure and a failure or delay in the performance of obligations;
- Non-involvement of the party in the creation of force majeure;
- Bona fide acceptance by the party of reasonably expected measures to prevent (minimize) potential risks.
Absence of at least one condition may deprive a party of the right to refer to force majeure.
How is it possible to confirm the fact of force majeure?
To prove the fact of force majeure, it is necessary to collect relevant evidence and immediately notify the counterparty. As a rule, force majeure is confirmed by a certificate issued by the Chamber of Commerce and Industry of the Russian Federation. Since March 26, 2020, regional Chambers of Commerce and Industry have been authorized to issue opinions on the fact of force majeure, including for all internal agreements. Moreover, such certificates are issued for free14. The period for notifying the counterparty (as is the notification procedure) is usually stipulated by the agreement. In case this issue is not settled by the agreement, it is advisable to do so as soon as possible.
Is force majeure a reason for amendment or termination of the agreement?
As noted above, force majeure itself does not release the parties from performing their obligations (the parties are only released from liability for their non-performance). Therefore, if under the current conditions the agreement becomes unreasonably burdensome, the agreement itself provides for no possibility of its amendment/termination, and the counterparty refuses to make concessions, it is advisable to consider the possibility of its amendment or termination by a court decision.
Thus, as a rule, a significant change in the circumstances whereon the parties based the conclusion of the agreement is the basis for its amendment or termination, unless otherwise provided for by the agreement or arisen from its substance15.
A change in circumstances is recognized as significant when they have changed so much that, if the parties could have reasonably foreseen it, the agreement would have never been concluded by them or would have been concluded on significantly different terms. If the parties have not reached agreement on bringing the agreement into compliance with significantly changed circumstances or on its termination, the agreement may be terminated or amended (amendment is allowed in exceptional cases when the termination of the agreement contradicts public interests or will cause a damage for the parties which will considerably exceed the costs required for its performance under the terms amended by the court) by the court at the request of an interested party subject to all the following conditions:
- Upon signing of the agreement, the parties assumed that no such change in circumstances would occur;
- The change in circumstances is caused by reasons that the interested party could not overcome after their occurrence with the degree of care and discretion required by the nature of the agreement and the terms of turnover;
- Performance of the agreement without amendment to its terms would violate the balance of property interests of the parties under the agreement in such a way and would cause such a damage to the interested party, that it would largely lose what it was entitled to expect upon the conclusion of the agreement;
- No customs or substance of the agreement stipulate that the interested party shall bear the risk of changed circumstances.
Upon the termination of the agreement due to significantly changed circumstances, the court at the request of either party determines the consequences of the termination of the agreement based on the required fair distribution of the costs incurred by the parties in connection with the performance thereof between them.
A request to amend or terminate the agreement may be filed by the party to court only after receiving the other party’s refusal to amend or terminate the agreement or failure to receive a response within the period specified in the offer or established by law or the agreement, and in case of its absence – within thirty days.
It should be noted that in case of amendment or termination of the agreement, obligations shall be considered amended or terminated from the moment the court decision enters into force. In other words, the agreement shall be considered valid for the entire period of the court proceedings. Therefore, prior to resolving to apply to court for termination/amendment of the agreement, it is advisable to check whether there are any other reasons for out-of-court repudiation of the agreement or its termination (for more information see the article of Artem Paleev).
- Clause 8 of Ruling of the Plenum of the Supreme Court of the Russian Federation No. 7 dated 24.03.2016, Clause 3 of Article 401 of the Civil Code of the Russian Federation.
- Rulings of the Federal Arbitration Court for the Moscow District No. КА-А40/9199-10 dated 01.09.2010, Federal Arbitration Court of the Volga District dated 21.05.2013 in case No. А55-25687/2012 .
- Ruling of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 6168/97 dated 09.06.1998.
- Clause 1 of the Review approved by the Presidium of the Supreme Court of the Russian Federation on 20.12.2017.
- Ruling of the Federal Arbitration Court for the Moscow District No. Ф05-2728/2016 dated 28.03.2016.
- Ruling of the Federal Arbitration Court for the Moscow District No. Ф05-9562/2017 dated in case No. А40-129109/2016.
- Decision of the Supreme Court of the Russian Federation No. 49-В05-19 dated 06.12.2005.
- Decision of the Supreme Court of the Russian Federation No. 303-ЭС15-5226 dated 01.09.2015.
- Ruling of the Federal Arbitration Court for the Far Eastern District No. Ф03-5191/2014 dated 28.11.2014.
- Ruling of the Federal Arbitration Court for the Moscow District No. Ф05-16473/2015 dated 09.12.2015.
- Clause 1.3. of the Regulation on the procedure for certification by the Chamber of Commerce and Industry of the Russian Federation of force majeure (Annex to Resolution of the Board of the Chamber of Commerce and Industry of the Russian Federation No. 173-14 dated 23.12.2015).
- Letter of the Chamber of Commerce and Industry of the Russian Federation ref. ПР-0315 dated 26.03.2020, Letter of the Federal Anti-Monopoly Service of Russia No. ИА/21684/20 dated 18.03.2020, Letter of the Ministry of Finance of Russia No. 24-06-06/21324 dated 19.03.2020.
- Review of certain issues of judicial practice related to the application of legislation and measures to prevent the spread of the new virus in the Russian Federation No. 1 (approved by the Presidium of the Supreme Court of the Russian Federation on 21.04.2020). Answer to question 7.
- Letter of the Chamber of Commerce and Industry of the Russian Federation ref. ПР-0315 dated 26.03.2020.
- Clause 1 of Article 451 of the Civil Code of the Russian Federation.
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