The pandemic events of recent months have dealt a serious blow to business

Some of my Russian clients – representatives of small and medium-sized businesses – turned to me for clarification: what could they count on in their contractual relations with counterparties in the “self-isolation” conditions introduced in Russia?

It just so happened that now lots of businessmen have paid close attention to force majeure contractual conditions, which had been previously taken by them extremely formally.

First of all, it should be noted that the regime of “self-isolation” was introduced in Russia indeed as illegal because its very concept and the procedure for its introduction had not been previously provided for by the law of Russia. Suffice it to say that the law “On Protection of Population and Territories from Emergencies of Natural and Technogenic Nature” is the best place for it, but it is not there yet!

The authorities have an explanation for this: the rapid spread of the pandemic and the need for quick and adequate measures.

In response to the confusion of the legal community, the Supreme Court clarified the possibility of recognizing the pandemic and related restrictive measures as force majeure in its “Review on Certain Issues of Judicial Practice on Application of Law and Restrictive Measures Against Spread of COVID-19 in Russia No. 1” dated 04/21/2020, thereby dotting the i’s and crossing the t’s on many issues that arose.

If you are not familiar with this review yet, these are some of the highlights of the Supreme Court’s position on the application of law provisions on force majeure during the pandemic:

  • Criteria for force majeure and a mechanism for exempting entrepreneurs from liability have always been in the law, meaning that nothing extra needs to be added;
  • Recognition of a pandemic as force majeure is not to be universal for all types of debtors, regardless of their activities, activity conditions and the region of Russia in which the business operates, whereby the fact of force majeure is to be determined with particular circumstances taken into account.

This means that in each case, the compliance with the criteria of force majeure and the fact of a causal relationship between such circumstances and the default should be fixed.

In connection with the pandemic, the Supreme Court made an important assumption in the interpretation of the general force majeure rule, according to which the lack of funds does not exempt the debtor from liability for default. Namely, the Supreme Court admitted that, if the lack of funds is caused by established restrictive measures, in particular, the prohibition of certain activities, the establishment of a self-isolation regime, etc., then it may be recognised as a ground for exemption from liability for non-performance or improper performance of obligations.

From this, we can draw the conclusion that the Supreme Court’s above assumption brings the Civil Code of Russia closer to the UN Convention on the International Sale of Goods (Vienna, 1980) in terms of force majeure, since the latter refers, under certain conditions, a violation of the obligation on the part of the debtor’s counterparties to force majeure.

The fact is that the debtor’s lack of funds (admitted by the Supreme Court as a force majeure) can have a direct causal relationship with a violation of the obligation on the part of the debtor’s contractors (admitted by the Convention as a force majeure).

Here is a typical example: a landlord fails to fulfill its financial obligations to his counterparty since a third party (a tenant that leases a space for a restaurant and a cinema from the landlord) was forced to close his premises due to the pandemic and had no money to pay to the landlord.

The pandemic may be a global for some time to come, and since the Supreme Court’s review was limited only to Russian law, I would recommend to entrepreneurs, whose transnational contracts are governed by the law of another jurisdiction, not to leave this issue unattended. If you aren’t sure, consult professionals as to how respective force majeure norms “work” in y jurisdiction, taking into account specific restrictions against the pandemic imposed by the authorities in a particular country.

360 Law Group has all necessary resources, and above all, professional lawyers in more than 60 countries, to assist you.

Anatoly Ivanenkov | 360 Business Law Russia

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