The COVID-19 pandemic and performance of contracts: force majeure or commercial risk?
The coronavirus epidemic will hit business hard. Already, many are faced with an inability to plan logistics operations, to perform supply contracts on the agreed date, or to outsource workers to quarantined areas. How can the performance of existing contracts be suspended without negative consequences?
Is coronavirus force majeure?
Russian law considers those circumstances to be force majeure that are both extraordinary (that is, not reasonably foreseeable at the time of the conclusion of the contract) and unavoidable. Some authorities and parts of the business community have already recognized the coronavirus epidemic as meeting these conditions:
- Decree No. 20-UM of the Mayor of Moscow dated 14 March 2020 classifies the spread of the coronavirus infection as a force majeure event;
- The Ministry of Industry and Trade, the Ministry of Justice and the Ministry of Finance of Russia are developing an act recognizing the epidemic as a force majeure circumstance in public procurement;
- The Chamber of Commerce and Industry of Russia is issuing certificates of force majeure to companies that have disrupted export supplies due to the epidemic.
What will the court pay attention to?
The final decision on whether the epidemic has the nature of force majeure for each specific contract falls within the exclusive competence of the court. All of the above acts will have only persuasive as opposed to binding force for the court. When resolving such disputes, the court will assess a number of circumstances, taking into account the specifics of a particular contract, including:
- The date of the conclusion of the contract. Thus, if a contract for delivery to a quarantined zone has been concluded after the announcement of the epidemic, the virus will not be recognized as an extraordinary circumstance – when deciding on delivery, the parties knew or should have known of its existence.
- The outbreak of the epidemic in a specific market segment. The party must prove that it was not able to overcome obstacles to the performance of the contract by making all reasonable efforts.
- Terms and conditions of the agreement regarding force majeure. Most commercial contracts contain force majeure clauses. These clauses may:
- establish what circumstances the parties recognize as force majeure (for example, epidemics entailing the introduction of quarantine measures);
- determine the necessary evidence of force majeure (for example, a certificate from the chamber of commerce and industry);
- clarify the consequences of force majeure (suspension of the contract, its termination, etc.)
How does force majeure affect the contract?
If a court finds the epidemic a force majeure circumstance for your contract, this may entail the following consequences:
- Relief of liability for breach of contract – during the period of force majeure you will not be charged with penalties, and the counterparty cannot recover losses. However, this does not mean the termination of the obligation itself: goods, work and services must still be delivered and paid for after the end of the epidemic.
- Suspension of deadlines for the performance of obligations – the law or the provisions of the contract may stipulate specific obligations. For example, the contractor has the right to suspend the performance of works in the case of an emergency which prevents such works from being completed on time.
Is it possible to terminate the contract in connection with the epidemic?
- Force majeure clauses in contracts often contain a condition that there is a right to terminate the contract in a case of force majeure circumstances or if they persist for a certain period (for example, 30 days).
- An obligation contained in the contract will automatically terminate if its performance is physically or legally impossible owing to an epidemic (for example, the authorities prohibit the holding of an event on a certain date).
- If it is possible to perform the contract, but this has become extremely difficult or is no longer of interest to the counterparties owing to changed circumstances, a party has the right to demand termination of the contract in court in connection with a significant change in circumstances. As in the case of force majeure, when considering such a dispute, the court will assess the situation in terms of how extraordinary the epidemic is, whether it is possible to overcome the obstacles caused by it, as well as the amount of loss that performing the contract on the original terms will cause to the parties.
No practice of dispute resolution has yet been formed in connection with the epidemic. Moreover, quarantine measures have stopped the work of the courts, so you should not expect the initial court decisions on this issue to emerge any earlier than by the end of this year. In these conditions, it is important to focus on reaching compromise agreements with counterparties:
- Risk analysis concerning existing contracts. Most contracts in commercial practice contain force majeure clauses whose content can vary significantly even within the same organization. We recommend compiling a matrix of these conditions and developing approaches to negotiations with counterparties, depending on their content.
- Securing evidence. It is necessary to record that it is impossible to perform obligations in connection with the epidemic. This step may include filing applications to chambers of commerce, government agencies, obtaining information from counterparties, etc.
- Negotiations with counterparties. We recommend that you inform counterparties in detail of difficulties you have encountered, including in the form of notifications for which force majeure clauses provide. Based on the results of negotiations, it is important to agree on supplemental changes to the contract: a suspension of deadlines for performing obligations, deferred payments, changes in the methods of performance, etc.