Pandemic contractual relationship
The coronavirus pandemic (COVID-19) has caused unprecedented action in many countries.
International and domestic travel has been greatly reduced. Restrictions were placed on various types of
businesses. Business representatives face difficulties in fulfilling their obligations, work contracts, loans,
lease agreements.
Inevitably, questions arise regarding the termination or amendment of contractual obligations, evasion
of liability for failure to fulfill obligations.
According to the latest proposals of the President of the Russian Federation V.V. Putin and the Russian
government, contractual obligations may be changed:
- the obligation, as a rule, should be exempted from liability for non-fulfillment / delay in the fulfillment
of contractual obligations (but not exempted from the obligation itself) as a result of force majeure
circumstances (Article 401 of the Civil Code of the Russian Federation);
- if the loan is not subject to fulfillment of obligations, then due to the delay of the debtor the rules of
force majeure must be observed;
- if it is impossible for the debtor to fulfill obligations due to force majeure circumstances, which may be
the basis for the termination of obligations (Articles 416, 417 of the Civil Code of the Russian
Federation);
- a significant change in circumstances may become the basis for changes or termination of the contract
(Article 451 of the Civil Code of the Russian Federation).
The provisions of the contract are important because they may indicate additional grounds for
exemption from liability for failure to fulfill their obligations or for the change / termination of their
obligations, or, conversely, they may exclude any grounds (for example, application of Article 451 of the
Civil Code of the Russian Federation).
In addition, certain laws were approved that affect the rights and obligations of parties to contractual
relations in specific areas (for example, real estate leasing and bank lending).
Exemption from liability for default due to force majeure. In accordance with Article 401 of the Civil
Code of the Russian Federation, a debtor may be exempted from liability for failure to fulfill obligations
if proper performance was not possible as a result of force majeure. However, the availability of this
exception depends on the presence of a “triad” of factors:
- exclusivity
- inevitability
- irresistibility.
Pandemic and governmental measures can in principle be classified as force majeure circumstances.
Russian authorities also share this position. However, the following must be considered:
- the pandemic and government measures alone do not indicate the existence of grounds for the
exclusion of liability in accordance with Article 401 of the Civil Code of the Russian Federation; in each
specific case, it is necessary to analyze whether the fulfillment of the obligation became impossible due
to force majeure circumstances or not, as well as how the parties to the agreement identified the risk of
force majeure;
- the event of force majeure in itself only exempts the party from liability for failure to fulfill an
obligation, but does not exempt this party from the obligation to fulfill it. For example, if the debtor is
unable to fulfill the delivery obligation, then, as a rule, he is exempted from fines / obligation to
compensate for losses due to late delivery, but not from the obligation itself. Contracts sometimes
contain clauses stating that if force majeure circumstances continue for a certain period of time, the
parties (both or one) may terminate the contract;
- violation of the obligation by the debtor (for example, for the supply of equipment) due to violation by
its counterparty (for example, a supplier of components for equipment), as a rule, is not considered a
force majeure event. However, if the default of the debtor’s counterparty is caused by force majeure, it
becomes unclear whether there are grounds for exemption from liability in the debtor-creditor
relationship or not. For example, in a number of cases, Russian courts followed the Vienna Convention,
which in such situations exempts the debtor from liability to the creditor;
- in the event of force majeure, the debtor, as a rule, must immediately notify the creditor of the
occurrence of the event. If the debtor does not do this, he will have to compensate for the losses
incurred by the creditor due to the lack of information about force majeure.
Nevertheless, since measures to combat the pandemic and government measures are well known, the
conclusions of the courts on the consequences of failure to provide notifications may vary from case to
case (for example, notification may be considered more important if the failure to provide notification is
due to a breach of the obligation of the counterparty of the debtor located abroad) .
- legislative provisions on force majeure are dispositive, therefore certain circumstances can be excluded
by agreement of the parties (or, conversely, included in the contract). Therefore, the provisions of the
contract between the creditor and the debtor should be analyzed in each case.
It is worth noting that the courts tend to adhere to a rather conservative approach to the exclusion of
liability on the basis of Article 401 of the Civil Code of the Russian Federation. But now, in the light of the
unprecedented nature of the situation and the government measures that have been taken (or are in
the process of adoption), a change in the position of the courts may occur.
Refusal of the contract by the creditor due to the temporary impossibility of performance by the debtor
due to force majeure circumstances.
Part 3 of article 401 and part 2 of article 405 of the Civil Code of the Russian Federation allows the
creditor to withdraw from the contract (and, for example, to demand the return of the advance
payment) in cases when force majeure circumstances cause a delay in the contract with the debtor and
the creditor loses interest in its execution. In the event of such a refusal, the creditor cannot recover
fines or losses from the debtor.
However, it may well be that in each specific situation, the courts will carefully check whether interest in
execution has really been lost and whether the refusal of the contract by the creditor was bona fide.
The inability to fulfill the obligation by the debtor due to the use of force circumstances may become
the basis for termination of the obligation. Within the meaning of Article 416 and 417 of the Civil Code
of the Russian Federation, if the impossibility of performance arising as a result of force majeure is not
temporary but permanent, the debtor is not only relieved of liability for default, but the obligation itself
(both the obligation of the debtor and the counter obligation of the creditor) is terminated .
It is important to note that execution should be impossible, and not just difficult. If the creditor has
already performed the performance, it must be returned (otherwise the debtor may receive unfair
enrichment). However, this may not be possible in practice in light of the potential risk of bankruptcy of
the debtor.
Amendment of the contract due to a significant change in circumstances
Measures to combat the pandemic and government measures could be considered in the context of Art.
451 of the Civil Code of the Russian Federation. If st.401 of the Civil Code of the Russian Federation
provides for the impossibility of fulfilling obligations due to force majeure circumstances, then st.451 of
the Civil Code of the Russian Federation provides for the following:
- the debtor can still fulfill the obligation, but its implementation will cause significant damage to the
debtor;
- damage refers to factors that:
1) are objective (i.e. are beyond the control of the parties to the contract),
2) did not exist and could not be provided for on the date of conclusion of the contract;
- the application of Article 451 of the Civil Code of the Russian Federation may lead to termination or
amendment of the contract by the courts. With this option, it is possible that the debtor can be not only
exempted from liability for failure to fulfill an obligation (according to Article 409 of the Civil Code of the
Russian Federation), but also can be fully or partially released from the obligation itself.
Courts, as a rule, are rather conservative in their approach to a possible change or termination of
contracts in connection with a significant change in circumstances. Nevertheless, the impact of the
Pandemic and government measures on each specific legal relationship should be considered, and it is
possible that the courts can apply Article 451 of the Civil Code to any legal relationship. It is possible that
Article 451 of the Civil Code of the Russian Federation is less applicable to long-term contracts than to
short-term contracts, to contracts with entrepreneurs, than to contracts with individuals who are not
entrepreneurs.
At the same time, it should be noted that the parties can exclude the application of Article 451 of the
Civil Code of the Russian Federation under an agreement.
In conclusion, I would like to note the measures of the Government of the Russian Federation that
directly affect the rights and obligations of the parties to contractual relations in certain sectors of the
economy:
1. On April 1, 2020, a law was passed “On Amending Certain Legislative Acts of the Russian Federation
for the Prevention and Liquidation of Emergencies”, which provides for a number of measures, including
vacation pay on rent. The law provides that tenants (not only those who rent state property) have the
right to demand a deferment of rental payments under lease agreements.
Within 30 days after receiving such a request from the tenant of the relevant property, the lessor must
conclude an additional agreement on the deferment of rent in 2020. The law also provides that the
conditions for such deferrals are established by the Government of the Russian Federation. There is
currently no such act. In addition, the law provides that tenants have the right to demand a reduction in
rent if it becomes impossible to use the property in connection with the decision to introduce a highavailability regime adopted by the state authority. the subject of the Russian Federation.
2. On April 1, 2020, the State Duma also adopted the Law “On Amending the Federal Law on the Central
Bank of the Russian Federation (Bank of Russia)” and “Some Legislative Acts of the Russian Federation”.
It provides, inter alia, weekends for the repayment of a loan. Small and medium-sized businesses,
private individuals and individual entrepreneurs were granted the right to demand a deferred payment
from the lender during the term of the credit line (loan agreement), but not more than six months.