- Posted by Awara
- On April 1, 2020
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What is force majeure
The COVID-19 pandemic and government efforts to curb its spread are challenging for businesses. Companies lose revenue, subcontractors spend a whole week on mandatory leave, there is not enough money to rent space, pay off loans, or pay salaries. Because of these problems companies would be happy to deny contractual obligations.
Agreements with counterparties contain a clause about “insurmountable circumstances”― force majeure. It is extraordinary obstacles to the fulfillment of all or part of contractual obligations. The company cannot influence these events in any way; they cannot be foreseen or prevented by reasonable means. In the event of force majeure, the parties to the agreement may not pay interest and penalties for unfulfilled obligations.
So can a virus epidemic or Presidential Decree become an objective justification for violating the terms of a contract?
Awara lawyers believe that it can. But consider:
1. In different agreements, a force majeure clause sounds different.
The actions that participants must perform may also vary. So, the parties may indicate in the contract different criteria for classifying events or documents as force majeure.
The epidemic may not apply to such circumstances under the contract.
As a rule, the parties establish a period during which, in the event of force majeure, one party must notify the other. The parties may establish the period of validity of force majeure circumstances which, if exceeded, the contract is subject to termination, or the parties hold special negotiations to determine possible options for fulfilling the contract.
2. The court can has a different opinion on force majeure.
The court will establish whether the circumstances were indeed force majeure under the contract, and whether they led to non-fulfillment of obligations. The burden of proof lies with the party applying the provisions on force majeure. If it is proved that force majeure circumstances have occurred and there is a relationship between them and the party’s failure to fulfill obligations under the contract, then the party that has not fulfilled its obligations will be released from liability.
3. Not all events can be considered as force majeure.
Entrepreneurial risks, deterioration of the economic condition of the enterprise, financial and economic crisis, change in the currency exchange rate, and devaluation of the national currency are not force majeure.
Suppose fewer customers began to come to a store in a shopping center, and revenue fell sharply. The fact that the organization now has no money to pay the rent is not force majeure ― you still have to pay the rent.
What to do about the rental of premises
Right now, due to restrictions by the authorities, access to the services of some companies is closed (for example, a fitness club, hairdresser, cinema). The RF CCI recommends that the tenant contact the owner of the premises and ask for a change in the terms of the contract due to a significant change in the circumstances from which the parties proceeded when concluding the contract. It may be possible to reduce rental payments or agree on a deferral (installment plan) for the duration of the restrictions. You can refer to the provisions of the lease or the Civil Code of the Russian Federation.
What do the authorities say about force majeure in the pandemic
What the Chamber of Commerce and Industry of the Russian Federation says
The prohibitions and restrictions imposed by authorities (government, governor, mayor) can be considered force majeure if it is impossible to fulfill the terms of the contract because of them.
For foreign trade contracts, the RF CCI issues certificates recognizing the situation as force majeure. The President of the Chamber of Commerce and Industry of the Russian Federation indicated that since March 26, the Russian CCI has been issuing certificates of force majeure in accordance with the terms of foreign trade transactions and international treaties free of charge. The RF CCI certificate is a document confirming the existence of force majeure circumstances, which gives an advantage to the party that received it.
What the Moscow Mayor and the Governor of the Moscow Region say
The decree of Sergei Sobyanin and the decree of Andrei Vorobyov said that the spread of the new coronavirus infection 2019-nCoV is an emergency and insurmountable circumstance.
Force majeure in public procurement
According to the letter of Federal Antimonopoly Service (FAS) of Russia dated March 18, 2020 for the public procurement sector, the coronavirus infection pandemic (COVID-19) is a force majeure event.
The Ministry of Finance, referring to the decision of the Plenum of the Supreme Court, concludes that the spread of the new coronavirus infection 2019-NCOV is extraordinary and insurmountable, therefore, it is a force majeure event (Letter of the Ministry of Finance of Russia dated March 19, 2020).
The Ministry of Industry and Trade supports the explanations of the FAS and the Ministry of Finance and also classifies the coronavirus pandemic as force majeure (Letter dated March 25, 2020). The Ministry of Industry and Trade, together with the Ministry of Justice and the Ministry of Finance, are developing an act recognizing the pandemic as force majeure in public procurement.
This will be taken into account when considering complaints, cases of administrative offenses, appeals on the inclusion of unscrupulous suppliers in the register and conducting inspections.
What to do if a contract is not fulfilled due to a foreign supplier
Suppose, under an agreement, you must supply imported spare parts to your Russian customer. But because of quarantine, the Italian factory of your supplier is not working ― you are not able to fulfill the terms of the contract with the buyer on time. In this case, first ask the foreign counterparty for the order of local authorities to impose quarantine. This will help you if your client sues for failure to fulfill the contract.