The Effects of COVID-19 on International Contracts in Russia

Force Majeure

The following circumstances can be considered as Force Majeure under the Russian law (article 401(3) of the Civil Code): unless otherwise provided by law or contract, a person who has not performed or improperly performed an obligation in the course of entrepreneurial activity shall be liable, unless he/she proves that the proper performance was impossible due to force majeure, i.e. extraordinary and unavoidable circumstances under these conditions. Such circumstances do not include, in particular, breach of obligations on the part of the debtor’s counterparties, lack of goods on the market necessary for the performance, the debtor’s lack of the necessary funds.

Material change of circumstances

According to Russian law (article 451 of the Civil Code) it is possible  to amend and terminate a contract due to a material change of circumstances, if :

1. There is a material change in the circumstances based on which the parties concluded the contract, unless otherwise provided in the contract or arises from its substance. A change in circumstances shall be deemed material when such circumstances have changed to such an extent that, had the parties reasonably foreseen it, the contract would not have been concluded or would have been concluded on substantially different terms.
2. The parties have not reached an agreement to bring the contract in line with the materially changed circumstances or to terminate it. In this case the contract may be terminated and or modified by the court at the request of the interested party, provided that the following conditions are simultaneously met:

• • at the time of conclusion of the contract the parties proceeded from the assumption that such change of circumstances would not occur;
  • the change in circumstances is due to events which the affected party could not overcome after the change occurred, taking into account the extent of care and diligence required from such party by the nature of the contract and the cause of events;
  • the performance of the contract would have substantially harmed the affected party, so that it would have largely lost what it was entitled to when concluding the contract;
  • the contract does not foresee that the risk of change of circumstances is borne by the affected party.

In case of termination of the contract due to material change of circumstances, the court at the request of either party shall determine the consequences of termination of the contract, based on the need for fair distribution between the parties of the costs incurred by them in connection with the performance of the contract.

Change of the contract in connection with a material change of circumstances is allowed by court decision in exceptional cases, when the termination of the contract is contrary to the public interest or will cause damage to the parties that significantly exceeds the costs needed to perform the contract on terms and conditions changed by the court.

The Supreme Court of the Russian Federation provided the following clarifications on evaluation of Force Majeure (Resolution of the Plenum of the Supreme Court of the Russian Federation dated March 24, 2016. No 7 “On application by courts of certain provisions of the Civil Code of the Russian Federation on liability for breach of obligations”).

The requirement of exceptionality implies the exclusivity of the circumstance in question, the occurrence of which is not usual in specific conditions.

Unless otherwise provided by law, an event shall be deemed to be unavoidable if any party engaged in similar activities could not have avoided the occurrence of that event or overcome its consequences.

The right to certify the existence of Force Majeure circumstances that affect the performance of a foreign trade transaction belongs to the Chamber of Commerce and Industry of the Russian Federation.

According to the regulation on the procedure for certification by the Chamber of Commerce and Industry of the Russian Federation, Force Majeure is defined as  extraordinary, unforeseen and unavoidable circumstances that occurred during the implementation of contractual obligations, which could not reasonably have been expected when concluding the contract, or avoided or overcome, as well as those beyond the control of the parties to such contract.

In particular, such circumstances include: natural disasters (earthquakes, floods, hurricanes), fires, mass diseases (epidemics), strikes, military operations, terrorist acts, sabotage, transportation restrictions, prohibitive measures of states, prohibition of trade operations, including with specific countries due to international sanctions and other circumstances beyond the control of the parties to the contract.

Entrepreneurial risks, such as breach of contract on the part of the debtor’s suppliers or sub-contractorss, lack of goods necessary for the performance of the obligations, currency exchange rate fluctuations, devaluation of national currency, criminal acts of unidentified persons, unless otherwise provided by the terms of the contract, cannot be deemed force majeure.

On February 5, 2020 the Chamber of Commerce and Industry of the Russian Federation made a statement that the entrepreneurs whose business has been affected by the situation with Coronavirus in China may obtain a Certificates of Force Majeure confirming their inability to fulfil contractual obligations due to circumstances beyond their control.

In order to obtain the Certificate of Force Majeure the interested Party needs to  file an application with the relevant supporting documents at the Chamber of Commerce and Industry of the Russian Federation in accordance with requirements set forth in the Regulation.

First of all, to review the Force Majeure and Hardship (Material Change of Circumstances) clauses in the contract, including the notice period, the timeframe of suspension of performance, any event  excluded.

Secondly, to do whatever is necessary to mitigate damages deriving from the possible non-fulfillment of the other party, for example by seeking alternative ways to fulfill its obligations towards the other companies that form part of the supply chain.

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