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Nuances of recognizing COVID-19 as force majeure

The coronavirus 2019-nCoV pandemic has happened to be a fairly serious challenge of our time with long-term consequences that are not easy to evaluate. Closing borders between states, imposing restrictions on movement over the country, stoppage of the work of enterprises, suspending the execution of contracts – all these and other factors result in the destabilization of the economic situation.

In accordance with clause 3 of article 401 of the Civil Code of the Russian Federation, unless otherwise provided by law or contract, a person who has failed to perform or improperly performed an obligation in the course of business is liable if he does not prove that proper performance was impossible due to force majeure, id est, extraordinary and unavoidable circumstances.

However, not all such circumstances can be considered force majeure.

The main criteria that should be followed when recognising circumstances to be force majeure are established by article 401 of the Civil Code of the Russian Federation. That is extraordinary and unavoidable event.

The Supreme Court of the Russian Federation clarified in the resolution of the Plenum dtd 24 March, 2016 No. 7 On the Application by Courts of Certain Provisions of the Civil Code of the Russian Federation on Liability for Breach of Obligations that the occurrence of circumstances should be external to the debtor’s activities and should not depend on the will or actions of the party (for this reason, the debtor’s lack of necessary funds, violation of obligations by its contractors, illegal actions of its representatives cannot be recognized as force majeure as a general rule).

On the 21st of April, 2020 the Presidium of the Supreme Court of the Russian Federation approved the Review On Certain Issues of Judicial Practice of the Application of Legislation and Measures to Counter Spread of a New Coronavirus Infection (COVID-19) N 1 on the Territory of the Russian Federation.

The Supreme Court explained in the Review that the recognition of the spread of the new coronavirus infection to be force majeure can not be universal for all categories of debtors, regardless of their type of activities and conditions, the region where organization operates.

Commencement of force majeure and the possibility of recognition of a circumstance as force-majeure must be stated taking into account each particular case (including the nature of the unfulfilled obligation, reasonable and conscientious actions of the debtor to reduce the consequences of default, etc.).

Examining the most common consequences caused by COVID-19, which affect the contractual relations of contractors in various fields of business activity, the Supreme Court also explained that even the debtor’s lack of funds can be recognized as a force majeure (although according to the general rule established in art. 401 of the Civil Code of the Russian Federation, it is not a force-majeure) if such a circumstance meets the above-mentioned criteria, if there is a causation and if such lack of funds was caused by restrictive measures taken by the state – a ban on the transport movement, restrictions on the movement of individuals, the suspension of businesses, a ban on mass and entertainment events, and others.

In addition, unless otherwise provided by the contract and does not arise from it, epidemiological situation, restrictive measures in regions, or the isolation can be recognized as grounds for changing or terminating the agreement in accordance with article 451 of the Civil Code. It is possible only when in the situation when these circumstances (force majeure) had been possible to be foreseen, the contract would not have been concluded or would have been concluded on significantly different terms.

Thus, the epidemiological situation in the regions, the closure of air, water and land borders of the state, the ban on the transport movement, restrictions on the movement of individuals, the suspension of businesses, the ban on mass events, as well as the consequences caused by these circumstances in the form of lack of funds, can be recognized as grounds for exemption from liability for non-performance of obligations, if the debtor proves the following:

1) The existence and duration of force majeure;

2) The debtor’s non-involvement in the occurrence of force majeure circumstances;

3) There is a causation between the force majeure and the resulting inability to fulfill obligations or delay in performance;

4) Conscientious behavior of the debtor in taking all reasonably possible measures to minimize the consequences and prevent possible risks.

However, it should be clarified once again that all issues related to the recognition of force majeure shall be resolved taking into account all actual circumstances and each specific situation.

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