The global pandemic of coronavirus and the protective measures (quarantines at borders, closures of ports, bans on mass activities, etc.) that accompany it are all part of the protection measures. Many people’s lives have been drastically altered by the coronavirus pandemic. All of these factors also have a serious impact on contractual relationships, making it difficult or impossible to perform certain contracts. Many are forced to seek out ways to withdraw from contracts or have them terminate with minimal loss because of the new reality.
This article will briefly and substantively address the key points regarding the impact of the coronavirus on contracts and related events and activities. I will refer to this all as coronavirus for the sake of clarity and brevity.
The majority of non-lawyers have already decided that the coronavirus was force majeure. This is force majeure. Contracts cannot be executed, and they must cease, in general, because of force majeure.
Actually, it’s not. It doesn’t give rise to non-fulfillment of or termination of contracts, even if coronavirus is force majeure.
We will be looking at 3 legal constructions.
1. Force majeure circumstances
2. Impossibility to fulfill obligations
3. A material change in the circumstances
Force Majeure Circumstances
Paragraph 372 of Article 372 of The Civil Code of Belarus (hereinafter referred as the Civil Code), states that, except where otherwise provided by law, any person who fails to fulfill an obligation or performs it in an improper manner during entrepreneurial activity is liable, unless he can prove that the proper fulfillment of that obligation is impossible because of force majeure. This refers to extraordinary and unavoidable conditions under these conditions.
This is the most important norm in the Belarusian legislation regarding force majeure. Our legislation does not include a list of circumstances that could lead to force majeure. These lists are at the discretion of the contracting parties.
What are the conclusions drawn from the above-mentioned norm?
1. For force majeure to apply, the circumstances must be exceptional and unavoidable in these circumstances.
2. Only the existence of force majeure circumstances exempts a party to a contract from liability if he has not fulfilled his obligations or has performed them incorrectly. The fulfillment of contractual obligations is not exempted by force majeure.
3. The contract might provide for a different regulation at this moment. For example, the rule that the existence of force majeure doesn’t exempt parties from liability.
Force majeure situations were traditionally divided into three types.
1) Physical nature – earthquakes and fires, catastrophes (epizootics), epidemics (epizootics), storms or eruptions, floods or tsunamis.
2) Social nature – Wars, revolutions uprisings coups terrorist attacks, etc. ;
(3) of a legal character – The issuance by competent authorities of various restrictions, prohibitions, embargoes and moratoriums.
This list can be reduced or expanded by the parties to a contract. A force majeure is a provision that allows for a change to the tax burden, customs duties, market conditions, or the inability of the counterparty to the contract to perform their obligations. These circumstances, however, are not considered force majeure.
Also, force majeure is not possible if the contracting party does not have sufficient funds. All of these are entrepreneurial risks.
Parties may agree to recognize certain circumstances as force majeure. The court will determine if they are force majeure if there is not consent. The documents issued by the relevant authorities, namely the Chamber of Commerce and Industry are not conclusive evidence of force majeure. They can be challenged in court.
The most important point is that force majeure does not apply to all situations. Force majeure will not apply to all circumstances.
A coronavirus-induced quarantine would result in force majeure for a Chinese factory. It cannot produce goods because its workers are home. The same quarantine is not applicable to it or any consulting company whose employees work remotely.
Nevertheless, it is evident that our neighbours recognize force majeure at legislative level. The Verkhovna Rada in Ukraine recognised the quarantine resulting from the coronavirus outbreak as force majeure. Moscow’s mayor declared force majeure, a state of high alert that is caused by the new coronavirus virus infection, a condition known as force majeure.
1. Each contract and every situation force majeure is unique, so there is no one universal answer (answer, advice).
2. The court will determine whether force majeure is present or absent based on evidence presented by each side to the dispute. All other information (and even my thoughts within the article) is subjective.
3. Force majeure does NOT exempt from performance of obligations under the contract. It only exempts from liability for their non-fulfillment.
1. Consider adding the following to the section on contracts devoted force majeure in light of the coronavirus situation:
2. This phrase can be extended to include in force majeure not only the actions of state bodies but also legal entities. Force majeure can also be defined as the announcement of quarantine by a company concerning the coronavirus that caused it to fail to meet its contractual obligations to the same counterparties.
3. The contract will usually specify a procedure for action in the case of force majeure. This is usually the sending of notice to one party, often with an attachment of a document from the competent authority verifying the existence of force majeure. You will not be allowed to use the link for force majeure if you violate this mechanism.
4. There are also nuances involved in obtaining a document from a competent authority. This is usually the Chamber of Commerce and Industry. Contracts usually include a deadline for the sending of a notice to force majeure to the other party, along with an appendix of a CCI certificate. This is typically within 5-10 business days of the onset or occurrence of force majeure. The Belarusian Chamber of Commerce and Industry issues the certificate of force majeure in 15-30 days. This is important to remember when you are drafting clauses to notify the other side that force majeure has taken place.
5. You or your counterparty can withdraw from the contract in case of force majeure circumstances if you expressly state this in the contract.
6. Remember also the norm at the second paragraph of Article 376, CC. This provision states that if the delay causes the debtor to lose interest, the creditor may refuse to perform and seek damages. This rule applies to delays in performance due to force majeure circumstances.
This rule can be applied to any relationship, regardless of whether you are on the side or the creditor.
Inability to fulfill obligations
Article 386 of Civil Code addresses the possibility of a party ceasing to be bound by an obligation due to impossibility. Paragraph 1 of this article says that if performance is rendered impossible by a bilateral agreement, the party does not have the right to, absent any other guidance from law or contract, demand satisfaction under the contract. Each party has the right of requesting the other to return all it has performed, without reciprocal satisfaction.
Forcible quarantine, border closings and other measures resulting from the spread of coronavirus are all clearly “circumstances” for which neither party is responsible. If one party has paid an advance payment and has met its contractual obligations, the other party can demand that the prepayment be returned.
The contract’s inability to perform its obligations is also grounds for termination. The impossibility to perform obligations as provided in this article is called a long (permanent), force majeure. Creditors lose interest in performance. The force majeure described in Article 372 Civil Code, as we have discussed, is also temporary.
Article 387 of Civil Code provides for a separate case of termination due to impossibility. This is the termination of obligations on the basis of an action of a state organ.
Paragraph 1 of this article says that if an act issued by a public authority makes it impossible to perform an obligation in whole or part, the obligation may be terminated in its entirety or in part. Parties that have suffered losses due to the act of a public authority have the right for compensation.
We also refer to the impossibility or inability of performing for the long-term – at most during the term of the obligation.
This means that if a state body in Belarus creates a universal quarantine and makes it impossible for a contract to be fulfilled, the obligations will cease.
The rules governing the return of prepayments in such cases should be set out in Article 386 Civil Code. The phrase regarding the recovery of damages can only be obtained from the state body which adopted the act and only if it is invalidated. You can decide for yourself how realistic it is given the Belarusian circumstances.
Material changes in circumstances
The Belarusian Civil Code contains an article that allows for the modification or termination of contracts. This is in preference to force majeure which is a common term. This Article 421 is about modification or termination of a contract due to significant changes in circumstances.
Paragraph 1 of this article states that any material change in the circumstances under which the parties arrived at a contract is grounds for modification or cancellation, except as provided by the contract or as follows from the substance.
If the circumstances have changed in such a way that the parties were able to reasonably foresee, or if the terms of the contract have changed, it is considered significant.
These are the conclusions that can be drawn from this rule:
1. The contract must be signed before any actions are taken to stop the spread of coronavirus (quarantines and border closures, for example). It will be harder to observe a significant shift in the circumstances if it is not completed before the start of these actions. Even though events are changing so quickly, it is possible for circumstances to change even further after publication of this article.
2. I believe it should not be difficult to determine the materiality or change in circumstances. For example, it is reasonable to assume that none of those who booked tours in the summer 2020 using the early booking service did so knowing of the outbreak of the coronavirus pandemic. Contracts for China-produced goods are the same. If the suppliers of these goods in Belarus knew that Chinese factories wouldn’t be able ship goods on time because of the quarantine closures or illnesses of workers, they would have to conclude different supply contracts with buyers in Belarus. They would need to agree to longer delivery times, lower penalties, and the condition that the coronavirus, which can cause non-delivery or untimely delivery of goods from China, is force majeure.
A material change in circumstances must cause the parties to modify or terminate their contract. You can file a lawsuit if you don’t have one.
The court may terminate or modify the contract upon request by the interested party if the following conditions are concurrently present (in parentheses in each paragraph of my comments).
1) At the time of concluding the contract, the parties assumed that no such change would occur. For example, the contract to purchase a summer trip to Italy was concluded during the winter when the coronavirus was in China and nobody was concerned about any pandemic.
2) The change in circumstances was caused by reasons the interested party couldn’t overcome after they occurred with the degree of goodness and caution that was required by it by the terms of civil turn ( this is harder – “couldn’t overcome” means it tried, but failed; however, with the situation with coronavirus, I believe it is difficult to say whether a single company should attempt to overcome it as a cause of the change in conditions).
3.) The performance of the contract without altering its terms would so violate their ratio of property rights that they correspond to the contract. This would cause such damage for interested parties that it would largely lose the expectations it had when entering into the contract.
4) It does not follow that the contract’s substance states that the risk from a change of circumstances is the responsibility of the interested party ( Rarely does anyone specify in contracts that a specific party bears the risk. There should be no problem with this clause
All four points must be present simultaneously, I want to emphasize again. The court will not end or modify a contract if at least one of these points is missing.
In practice, however, it is extremely difficult to prove that these points are present simultaneously. These cases have never been presented to me in all my years of experience. Particularly, after several devaluations, companies attempted to terminate or change contracts using Article 421 of Civil Code. However, the Belarusian courts didn’t consider devaluation to be a significant change to circumstances. Lawyers say that the three times the ruble changed against the dollar was a significant change in the circumstances.
We will soon see how the practice of attributing coronavirus to significant changes in circumstances will evolve, I believe.
1. You can request that your counterparty terminate or modify your contract if the coronavirus has adversely affected it.
2. Assess whether the four points above apply to your case if the counterparty objected to modification or termination. You can file a lawsuit in court if you think there is.
3. Regardless of what happens, remember that you must comply with all obligations until the contract is terminated or modified. You will be responsible for any non-fulfillment of your obligations under the contract.
The second section of this article will address the questions I received about the subject under consideration.