COVID-19 and Contractual Relations
How coronavirus pandemic has influenced performance of contractual obligations under the Russian Law?
In Russia, a number of strict containment measures have been taken in connection with COVID-19 pandemic. Effectively, the country is in lockdown. Of course, these measures and the pandemic itself have an enormous influence upon other spheres of life: commercial contracts, litigation and judicial process, administrative processes in different authorities, labour relations, etc.
Since the beginning of March 2020, the regulations related to the pandemic have been changing almost daily.
Below is a short overview of how the pandemic may influence the contractual relations under the Russian law.
There are three basic scenarios which may follow the inability of either party to perform the contract due to the containment measures taken (or the pandemic itself – which is less likely to be applicable in practice).
A. Force majeure
Under the Russian law (art. 401 of the Civil Code), a party may be relieved from the contractual liability if the non-performance has been caused by an extraordinary event or circumstance beyond the control of the parties. The force majeure does not automatically relieve a party from its contractual obligations, but only exempts from the contractual liability (i.e. damages or penalty).
To be excused for the non-performance, a party needs to prove that (a) the circumstances in question are extraordinary and beyond the control of the parties, and (b) that the non-performance of the obligation is a direct result of these circumstances.
The Chamber of Commerce and Industry of the Russian Federation has already stated that the containment measures taken against COVID-19 may be, in certain cases, deemed as such circumstances (not the pandemic itself). Of course, if a contract has been concluded after the start of the pandemic, these circumstances may not necessarily be considered as extraordinary (at least, as the parties might be deemed to have the knowledge and awareness of the risk when entering into the relevant contractual relations).
The law expressly states that the following cases do no fall within the force majeure concept:
- the non-performance of the debtor's counterparties;
- absence of a certain type of the goods;
- lack of money.
Therefore, it is unlikely that a party may refer to the force majeure in case, for example, on non-performance of a monetary obligation (since the lack of money itself cannot be deemed the force majeure).
The applicability of the force majeure rules is determined by the courts on case-by-case basis. Therefore, in each case, the party referring to force majeure will have to provide all the necessary evidence to prove that the non-performance has resulted from the circumstances beyond the party's control.
Finally, to invoke force majeure rules the party has to notify the other party of the situation immediately and take other measure required by the contract (e.g., provide a certificate of the force majeure event from the Chamber of Commerce).
B. A fundamental change of circumstances (the so-called clausula rebus sic stantibus)
There may be another situation when an obligation has not been performed yet, but the parties foresee that there may be material obstacles to its performance, or the obligation cannot be performed at all without an unreasonable loss for either party. In such a case, an interested party may ask another party to amend or terminate the contract due to the fundamental change of circumstances. If there is no agreement between the parties about it, the dispute may be referred to court (art. 451 of the Russian Civil Code).
There are three conditions that should be met for the application of these rules:
at the moment of entering the contract, the parties did not (and could not) expect such a change of circumstances;
the change has resulted from an extraordinary event beyond the parties’ control, and the contract does not place the risks of such an event on the interested party;
further performance of the contract on the same terms would harm the interested party to the extent that it could not predict when has entered the contract.
These provisions of Russian law are expected to be applied a lot in the current situation of the pandemic – for instance, in tenancy contracts for shopping malls and office buildings (especially for short-term leases).
C. Inability to perform
There is also a separate rule for the cases where a party has become completely unable to perform an obligation due to the circumstances beyond its control – for example, due to the governmental act (e.g., termination of regular flights due to the border restrictions).
In that case, the obligation may be terminated as a result of the inability to perform (art. 416-417 of the Russian Civil Code).
As a general rule, neither party will be held liable in such a case. However, any amounts that have been already performed may be claimed based on the rules of unjust enrichment.
Taking into account the rules described above, here are some basic recommendations for businesses performing their contracts during the pandemic:
- First of all, it is very important to be aware of any restrictions or containment measures that may influence the contract obligations in question (especially if the obligation is related to import or export, public events or other 'sensitive' spheres). So daily update of the information on the current regulations is absolutely needed.
- When entering a new contract: the parties may prepare themselves for the possible restrictions by adding a specific clause to the contract for such cases. The clause may provide a procedure for amending or terminating the contract in certain cases, or determine how the expenses should be allocated between the parties.
- When having any difficulties with active contracts: give a notice to the other party as soon as possible and consider revising the contract terms due to the circumstances. If the agreement is not feasible, try to collect as much evidence of force majeure as you can, and, at the same time, take any possible action in order to perform the obligation in due course.
For certain types of obligations, separate rules may be provided by the law. For instance, there is specific regulation for tenancy contracts (some of the rules have been enacted specifically for the situation with COVID-19). See more in our article on COVID-19 and lease relations.
This article is prepared under the multi-disciplinary consulting practice – COVID-19 Helpdesk.