Force Majeure and Other Concepts under Russian Law and Their Impact on Various Contracts

Russian Law

In this article we briefly describe the general provisions about Force Majeure and other relevant concepts under Russian law (such as Impossibility of Performance and Material Change of Circumstances) and focus on special rules for the particular contracts.

General Provisions

Force Majeure

Article 401 of the Russian Civil Code (RCC) states that a defaulting party shall be liable unless it can prove that proper performance of its obligations has become impossible due to force majeure, i.e. extraordinary and unavoidable circumstances.

The extraordinary circumstances requirement amounts to the exceptional character of the circumstances, whose occurrence is not normal under specific conditions.

“Unavoidable” means that any party carrying out similar activities could not have avoided the occurrence of the circumstances or their consequences.

Under Russian law, an event is not deemed force majeure (FM) if its occurrence is dependent on the will or actions of the debtor. For example, the following circumstances are not deemed FM events:

  • Violation of duties by the debtor’s counterparties (subcontractors, banks, suppliers, etc.);
  • Lack of goods on the market needed for the performance;
  • The debtor’s lack of money (see one exception below);
  • Unlawful actions of the debtor’s representatives.

COVID-19, restrictive measures of the state and self-isolation regime do not constitute FM by default, but may be recognized by courts as FM. For example, a traffic ban or restrictions on people’s movement might be recognized as FM under the newly adopted Case Law review prepared by the Supreme Court. The Supreme Court has even committed a revolution in Russian civil law, since it had allowed to recognize the debtor’s lack of money as an FM event if such a lack is caused by prohibition of the particular activities. The Supreme Court itself described a significant reduction of profit due to forced closure of catering companies as an FM event.

Absent any contractual provisions to the contrary, the general principles of Russian law require the debtor to (i) notify the creditor immediately or within a reasonable period of time of the FM event, and (ii) mitigate potential damages.

The occurrence of an FM event allows the debtor affected thereby to:

  1. Postpone performance;
  2. Be released from liability from non-performance (contractual penalties and compensation of damages at the discretion of the court);  
  3. In case of the creditor’s early termination to be compensated for goods delivered and services provided, as well as for costs already incurred in the preparation for future performance.

The occurrence of an FM event allows the creditor to terminate the contract early if the creditor is no longer interested in the performance of the contract, which the creditor must be able to prove.

These provisions may be modified contractually.

A Right to Suspend Reciprocal Performance

Two obligations are deemed to be reciprocal if they are mutually interconnected and performance of the first obligation is a necessary condition to perform the second one. Classic examples of reciprocal obligations under Russian law are synallagmatic obligations. To simplify, it regards contracts where one party is both a debtor in one obligation and a creditor in another one. For instance, the obligation of the tenant to pay for the premise is interconnected with the obligation of the landlord to provide the premise. Without access to the premise, no payment obligation exists. In a sales contract, the seller is obliged to transfer goods only if the buyer pays for the transfer and vice versa.

Under par. 2 of art. 328 of the RCC, if the debtor fails to perform its obligation or upon the circumstances, obviously demonstrating that performance will not be made within the term, the creditor is entitled to suspend its reciprocal obligation, where he acts as a debtor, or refuse to perform. If performance is partial, the creditor is entitled to suspend his obligation or refuse to perform to the extent proportionate to non-performance by the debtor. 

Par. 3 of art. 328 of the RCC provides that neither party is entitled to request that the court grant specific performance without making his reciprocal performance. That means that if both parties suspend their respective obligations, neither party will be entitled to claim specific performance.  

Art. 328 of the RCC might be waived or modified by the contract. This article also applies to FM events. Let’s imagine that the customer under a construction agreement paid 30% of the contract price in advance. The contractor is affected by FM and cannot complete the work on time. In this case the customer is entitled to invoke art. 328 of the RCC and suspend the rest of the payments, even if under the construction agreement the term for making the payments has expired.

How to Prove Force Majeure

If the contract is entered between a Russian entity and a foreign one, it is deemed to be a foreign trade transaction. In this case, the affected party needs to contact the Chamber of Commerce and Industry of the Russian Federation (CCI) and get a certificate of FM. If the contract is entered between two or more Russian entities, then the occurrence of FM can be confirmed by acts of authorities, for example, by the Russian Ministry of Internal Affairs of the Russian Federation, the Ministry for Civil Defense, Emergency Situations and Relief of Natural Disasters of the Russian Federation.

For the avoidance of doubt, whether the transaction is of a foreign trade character or not, it is usually better to contact the CCI and get a refusal. Such a refusal clearly proves that the debtor complies with the procedure of FM confirmation.

Nevertheless, because of COVID-19, regional branches of CCI are currently providing FM certificates free of charge even between two Russian counterparties. 

Impossibility of Performance

The obligation is terminated if its performance becomes impossible due to:

  1. Physical impossibility (Art. 416 of the RCC), whereby the obligation cannot be performed by anyone (not only by the debtor) – the so-called objective test – such as an obligation to transfer a unique individually-determined good which no longer exists or an obligation to render personal services in case of the service provider’s death; and 
  2. Change of law (Art. 417 of the RCC), whereby performance becomes unlawful.

If the change of law is temporary, but extends beyond the term of the contract, then this qualifies as Impossibility of Performance.

Impossibility of Performance results in automatic termination of the obligation. Although there is no formal requirement to notify, it is generally recommended to do so due to good faith requirements.

Material Change of Circumstances

In the event of a material change of circumstances (MCC), the affected party may seek the contract termination or modification (Art. 451 of the RCC). That means that the affected party is entitled to initiate negotiations in order to adapt the contract to the changed circumstances. If such initiated negotiations do not result in any modifications, the affected party may apply to courts.

An event is deemed MCC if the change is so radical that the parties would not have executed the contract or would have executed it under significantly different terms, if they could reasonably foresee such a change.

Courts are authorized to terminate the contract if all of the following conditions are present simultaneously:

  1. At the time of the execution of the contract, the parties did not foresee such a change;
  2. The change is caused by reasons that the affected party could not have overcome after its occurrence, to the extent of care required by the contract and customary business practices;
  3. Performance in strict accordance with the contract would break the equilibrium between the parties and harm the affected party so much that the affected party would be significantly deprived of what it could have expected when entering into the contract;
  4. It does not follow from the contract or customary business practices that the affected party bears the risk of MCC.

A court is authorized to modify the contract in exceptional cases if all four conditions above are present and:

  1. Termination would contradict the public interest; or
  2. Termination would cause damages to the parties, the amount of which would exceed significantly the costs necessary to perform the contract in accordance with the new terms of the contract, amended by the court.

FM completely blocks the performance of the obligation, while MCC just makes it burdensome to perform. In the event of MCC the debtor must perform the obligation and, consequently, shall be held liable for non-performance, in comparison with FM. However, he has a right to demand the modification of the contract or its termination, as well as allocation of expenses incurred in conjunction with the performance.

Deposit and Advance Payment

If one of the parties transferred money in advance, there might be two different approaches. If money is transferred to secure the obligation of performance, then it is deemed to be a deposit. If money is transferred to prepay for the performance, then it shall be regarded as an advance payment. In case of advance payment, money is subject to return.

For money to be considered a deposit, the parties shall conclude an agreement in writing, where they directly specify that the sum of money transferred is a deposit (Art. 380 of the RCC). If the parties fail to agree in writing or in case of any doubts, the sum is considered to be an advance payment. In case of deposit, par. 1 of art. 381 of the RCC states that the sum of deposit is given back due to Impossibility of Performance. 

It should be emphasized that art. 381 of the RCC says nothing as to FM events. In our opinion, in case of FM, deposit shall remain with the holder. The mere idea of a deposit is to ensure proper performance. In case of FM, obligations of the debtor and the creditor continue (in comparison with Impossibility of Performance). Then the deposit continues to ensure performance but for the future – when FM events will disappear and the affected party will perform its obligations, the deposit ensures that another party will perform its obligations in response. The deposit shall remain with the holder even in case of the contract termination by another party.

Lease

Use of the Leased Premises

Since the obligation of the tenant is to pay for the lease, the concept of FM does not apply by default. Nevertheless, there is room to consider MCC or even Impossibility of Performance, as will be shown below.

Under par. 4 of art. 614 of the RCC, the tenant may demand a reduction of lease payment if terms of use have significantly deteriorated due to circumstances for which he is not responsible. Consequently, the tenant is not entitled to not pay at all. 

However, Russian domestic courts adhere to the view that the tenant is not obliged to pay for the term when he is deprived of the possibility to use the premises due to reasons beyond his control.

In April a new federal law was passed (Federal Law No. FZ-98 “On the amendments to certain legislative acts of the Russian Federation on the prevention and liquidation of emergency situations”). This law in par. 3 of art.19 states that the tenant has a right to demand a reduction of lease payment due to the impossibility of use, caused by the restrictive measures of federal and regional authorities. 

To our mind, such a provision shall be construed in interconnection with other provisions of the RCC. For instance, par. 1 of art. 614 provides that the tenant pays for the use. Par. 4 of art. 620 prescribes that the tenant is entitled to early termination of the contract if the premises are of conditions unsuitable for use due to circumstances, for which the tenant is not responsible. 

Therefore, the tenant is not obliged to pay if he proves that the site cannot be used. The relevant act, making use illegal, might be the proof of such impossibility. At the same time, the landlord is entitled to invoke FM or Impossibility of Performance to be exempted from any liability for not providing the premises or access to them, since he meets requirements imposed by the authorities.

In Case There Is No Voluntary Agreement Between the Parties

If use is still possible, but its terms have significantly deteriorated, then the affected party may apply to courts under par. 4 of art. 614 and art. 451 of the RCC (MCC). Court will determine a fair lease payment rate.

If use is impossible, then the affected party may apply to courts to terminate the contract. The excessively paid lease payment or sums paid in advance constitute an unjust enrichment (art. 1102 of the RCC) and will be reimbursed to the tenant under the court decision.

The Effect of Insurance

In the interactions between the insurance company and the tenant, the tenant has at least two duties:

  1. To notify the insurer about occurrence of the insured event (liability under the lease agreement) (art. 961 of the RCC);

If the tenant realizes that he cannot afford the next month of lease, then he shall notify the insurer immediately, otherwise the insurer will refuse from making the payment.

  1. To take affordable measures to mitigate the amount of losses from the occurrence of the insured event (art. 962 of the RCC).

This means that the tenant must initiate negotiations with the landlord to reduce lease payment and penalties, otherwise the insurer will be exempted from payment.

Leasing

Leasing under Russian law is considered as a kind of lease agreement, so all general lease rules apply to leasing as well, if they do not contradict specific rules. 

In general, under art. 665 and 670 of the RCC the lessor is not responsible before the lessee for the seller and the property sold. However, the lessor and the lessee are joint creditors in their relations with the seller. If controversies occur with the seller, then general rules of sales and supply apply to leasing, if they do not contradict specific rules.

There are already some negotiations in leasing relations. For example, Aeroflot agreed with VTB Leasing to postpone payments as to 19% of its aircraft up to July 2021. The Government of Russia is also working on the law which would put off payments and adopt zero VAT for air companies which have suffered most from COVID-19.

Sales and Supply

In general, reference to FM in sales or supply contracts is complicated. As it was stated above, lack of goods on the market, needed for performance, is not recognized as an FM event, as well as breach of obligations by the seller’s sub-suppliers. For example, if the seller undertook to deliver medical masks, but because of scarcity or increased prices performance is burdensome, the seller cannot rely on FM to be excused for non-performance or delay. This also applies to situations when the price of delivery becomes more expensive because of new custom restrictions or prohibition of delivery by the particular transport. If performance is possible by ships or planes in case of prohibition of tracks and trains, then performance shall be made. In similar cases increased costs might be allocated between the parties under MCC. However, in some cases we should conclude that there is only shifting of risks between the parties which even blocks reference to MCC for the seller.

FM may be present in foreign trade transactions. For example, when the seller undertook to deliver goods on the territory of the buyer, which is now totally closed due to acts of authorities. In this case the seller will be entitled to invoke FM or even Impossibility of Performance. 

There is also one specificity of FM consequences in sales contracts. In general, the occurrence of an FM event allows the creditor to terminate the contract early if the creditor is no longer interested in the performance of the contract, which the creditor must be able to prove. However, par. 2 of art. 457 of the RCC provides that the sales is deemed to have a strictly defined deadline for the seller to perform his obligation, if it expressly follows from the contract that the buyer loses interest in performance out of the deadline. In this case the seller may perform his obligation after the deadline expiration only upon the buyer’s consent. 

This differs significantly from the default rule of FM. If the contract says nothing, in case of FM the buyer cannot refer to loss of interest in performance and terminate the contract. If the contract directly provides for the loss of interest in performance after the deadline expiration, then the buyer is not bound by the requirement to prove his loss of interest and is entitled to terminate the contract.

In contrast, for supply contracts par. 3 of art. 511 of the RCC states that the buyer is entitled to notify the supplier and refuse to accept the goods whose delivery is delayed. Nevertheless, this article says nothing about contract termination, which means that the general sales rules apply – par. 2 of art. 457 of the RCC. If the supply contract says nothing, the contract continues to be in effect, and the buyer will be obliged to accept goods delivered on time after the FM events cease. For the avoidance of any doubt, under Russian law supply is considered to be a kind of sale. Thus, in case of no specific supply provisions, general sales rules apply thereto.

Rendering Services

If the provider of services cannot render services due to circumstances for which neither party is responsible, the customer, nevertheless, shall reimburse the provider all costs already incurred in connection with the services, as it derives from par. 3 of art. 782 of the RCC. For example, if the provider incurred necessary costs for the preparation of the next set of services (not yet rendered), then the provider is entitled to reimbursement of these costs incurred. Art. 782 of the RCC does not shed light on whether these rules apply in case of FM or Impossibility of Termination. In our opinion, it applies in both cases.

Regarding the services rendered, they are subject to full payment from the customer.

Construction

Under par. 1 of art. 716 of the RCC, the contractor is obliged to notify the customer of all circumstances, for which the contractor is not responsible, which constitute impossibility to perform the contractor’s obligations on time. Violation of such a duty entails compensation for damages to the customer.

Art. 717 of the RCC directly endows the customer with a right at any time to terminate the contract. However, in this case the customer is obliged to pay for the work already performed and compensate the contractor for damages caused by the early termination, in the amount not exceeding the difference between the total price of the contract and the works already paid. 

To sum up, the customer is free to decide on which grounds to terminate the contract. On the one hand, he is entitled to prove that he lost interest in performance. Consequently, the customer shall not compensate damages. On the other hand, the customer is entitled to terminate the contract under art. 717 of the RCC, since it might be easier to compensate for relatively small damages instead of proving the loss of interest. Furthermore, the contractor bears the burden to prove both the fact and the amount of damages, and there is a chance that the contractor will not claim damages in court. 

Loan

Since any loan comprises monetary obligations, the concept of MCC is most appropriate. By reference to MCC, the borrower can ask the court to modify the contract (the courts, however, rarely apply MCC).

Despite this unfortunate fact, the borrower can apply for “credit vacations”. During this grace period the borrower does not have to return a loan or interest accrued with funds. Penalties are not charged during this grace period as well. 

Natural persons, individual entrepreneurs and small or medium-sized businesses operating in the sectors that have suffered the most from the pandemic can rely on credit vacations. The grace period is provided even for those who delayed payments before. All penalties incurred in conjunction with delays are to be paid after the grace period. 

Agency Agreement

There are two ways to appoint an agent under Russian law. The first is to nominate an attorney. The second is to appoint a commission agent. 

Attorney

An attorney acts on behalf of his principal. So any third party considers the attorney as a principal and concludes the contract with the principal by means of the attorney. The principal remains responsible for all contracts concluded by the attorney on his behalf (art. 971 of the RCC). The attorney is responsible only before the principal in their internal relations. 

If the attorney is affected by FM, but his principal not, the principal shall perform his obligations under the contract concluded by the attorney. It does not matter for the third party since the only principal is responsible under the contract. If the principal is affected by FM, but his attorney is not, then the principal may invoke FM. Nevertheless, if the attorney himself is able to perform the contract or commit actual actions, then he should do it. Otherwise the third party is entitled to claim breach of the contract and breach of good faith principle.

It is interesting to consider a situation when both the principal and his attorney are affected by FM. Art. 187 of the RCC states that the attorney may reappoint another attorney if it is necessary to pursue the interests of the principal. Despite this article not expressly regulating FM events, we could assume that the attorney shall reappoint another one in case of FM. There are only two preconditions for that:

  1. Power of attorney does not prohibit a reappointment;
  2. New power of attorney must be notarized.

So if both preconditions are met, then the attorney shall reappoint another attorney.

The attorney has under art. 974 of the RCC an obligation to transfer to his principal everything that the attorney received from third parties. In this regard FM does not likely arise, if the attorney is obliged to transfer money received. Nevertheless, it may arise, if the attorney is obliged to transfer goods. 

Commission Agent

A commission agent acts on his own behalf. Any third party considers the commission agent as an independent party. As a result, he is the only party to the contracts concluded by him. The principal is in no way responsible for the contracts concluded by the commission agent. However, the commission agent remains responsible before the principal in their internal relations. The commission agent is responsible before the principal only for the performance of his own duties and, in general, not responsible before the principal for the performance from third parties.

The only exception is when the commission agent undertakes to be responsible for the performance from third parties, which is called del credere

Let’s consider different variants. If the principal is affected by FM, the commission agent cannot refer to FM before any third party and shall be held liable for his non-performance. If the commission agent is affected by FM, he is entitled to invoke FM before the third party. Finally, if the third party is affected by FM, the attorney, having del credere, cannot invoke FM before his principal. 

When there is a default situation without del credere, though the commission agent is not responsible before his principal for non-performance from the third party, the commission agent is obliged to immediately notify the principal and commit an assignment to make the principal a party to the contract, as it is enshrined in par. 2 of art. 992 of the RCC.

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