How the Endemic Status of the Coronavirus Affects Contracts Worldwide

08 April 2020

On March 11, 2020, the World Health Organisation (WHO) declared the new coronavirus, (COVID-19), a global pandemic. With more countries announcing quarantine regimes, businesses are dealing with an increase in contractual defaults. This affects various aspects of all industries around the world, including transport logistics, supply chains, large scale construction projects and financial obligations, amongst others. 

Here we will look into the circumstances, in which a party to a contract may rely on an express force majeure clause or any implied contract law norms under English and Russian law. 

Force Majeure

English Law Overview

Under English law, there is no standard definition of what constitutes a "force majeure" event. A force majeure clause would typically be negotiated individually in every separate deal. As a result, one should carefully analyse every force majeure clause to determine whether it may cover defaults, caused by the virus. Generally, the force majeure clauses in English law contracts would either list the specific events amounting to a force majeure or set a criteria to be satisfied in order to prove that a force majeure did take place indeed. 

The specific events may include wars, acts of government, riots, terrorism, hurricanes, earthquakes and epidemics. Clearly, if an epidemic is specifically included in a list of the relevant events, then Covid-19 will be covered. One should bear in mind, however, that a causation link with the virus and a specific default will have to be proved. In the absence of an epidemic in a list of specific force majeure events, one might be able to rely on an "act of government" event, provided that a failure in question was caused by a specific act of government, such as trade embargoes, for example. If an "act of government" is also not on the list, then one might argue that the parties intended for an epidemic to be included as well and that the list is not exhaustive. There must be a sufficient ground to demonstrate the same. If the language of the clause is clear and the list is said to be complete, then it won't be possible to argue for the inclusion of any events not specifically mentioned, including a pandemic. 

A force majeure clause may not be included in a list of any specific events and instead just state that it covers events which are "beyond the parties' reasonable control". Whether the event really is beyond the parties' reasonable control will require a detailed analysis of an event in question. 

One should bear in mind that normally, to prove a force majeure event, it is not enough to show that the event made a contractual performance more difficult, more expensive, less profitable or not profitable at all. It will be necessary to show that performance actually became physically or legally impossible.

Russian Law Overview

While under Russian law, same as under English law, there is no specific definition as to what constitutes "force majeure", the general approach to establishing a force majeure is quite different. First of all, under Russian law, force majeure concept operates similarly to an implied term concept. S.401 of the Russian Civil Code provides, that "the person shall not be liable, if, taking into account the extent of care and caution, expected from the person in light of the nature of the undertaken obligations and the scale of business in question, he has taken all the necessary measures for properly discharging his obligations". Generally, Russian law establishes a certain criteria, which has to be satisfied before a force majeure can be established: (1) extraordinarity – exceptional and unusual circumstances, impossible to avert under the given conditions; (2) inevitability – impossibility of influencing the occurrence of a given circumstance or its consequences. Regarding the first criteria, it is specifically stated in s.401 that "to such kind of circumstances shall not be referred, in particular, the violations of obligations on the part of the debtor's counter-agents, or the absence on the market of commodities, indispensable for the discharge, or the absence of the necessary means at the debtor's disposal. S.401 applies irrespective of whether or not there is a force majeure clause in a contract. 

Nevertheless, a force majeure clause can often be found in a Russian law governed contract. Same as with the English contracts, such clause normally provides for the certain mechanisms as to what exactly should happen in case of a force majeure event in term specific responsibilities, allocation of risks, consequences, etc. 

Obviously, an occurrence of a force majeure event in itself will not trigger s.401 referred to above. To be exempt from the liability, a party, failing to fulfil a contractual obligation, has to prove: (1) the fact that it was force majeure that caused the non-performance or improper performance of the contract; (2) the fact that a party has complied with all the obligations stipulated by the contract or by law, which may include an obligation to mitigate the losses, to make certain notifications, comply with other procedures, etc.


English Law Overview

What if there is no force majeure clause or if it is too narrow and does not cover the current pandemic situation? 

As we have seen from the above, Covid-19 may not necessarily be covered by a force majeure clause. Additionally, a force majeure clause may not be present in the contract at all. However, even in the absence of a force majeure clause, a contract might be brought to an end if a contract was frustrated. 

Under English law, an unforeseen subsequent event outside of control of the parties may be seen as a frustration if it rendered a contract impossible to perform or transformed the performance into something radically different from what was originally agreed. 

Frustration is difficult to prove because it requires a physical or legal impossibility to perform. Not long ago a High Court of England made a decision in which it concluded that Brexit does not frustrate a 25 years lease of premises to the European Medicines Agency in London, even though the agency mist move its premises to another EU Member State as the result of Brexit (Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch)).

Russian Law Overview

As explained above, one can rely on s.401 of the Russian Civil Code in case of a force majeure situation, irrespective of whether or not there is actually a force majeure clause in a contract. 

There are other laws, apart from force majeure, which may potentially be invoked in the context of a current situation in connection with the pandemic. These laws are set out in ss.416, 417 and 451 of the Russian Civil Code and can be summarized as follows: 

(1) termination of an obligation in the event of physical and/or legal impossibility of its fulfilment (i.e. when it is no longer possible to fulfil the obligation); 

(2) termination or amendment of a contract if the circumstances, which essential for the performance of the contract, changed to the extent so that neither of the parties could have foreseen this when concluding the contract; 

(3) Termination of an obligation pursuant to an act of a public authority or local government. 

An application of the above listed alternatives to force majeure is very difficult in practice. The Russian courts would allow them to be relied upon effectively probably as rarely as the English courts would allow for a frustration of a contract to be successfully established. 

Consequences of Force Majeure and Frustration

English Law Overview

Often a force majeure clause will specify the consequences of a force majeure event taking place, including what happens if an event in question leads to a delay or hinders performance, as opposed to making it totally impossible. Establishing a total impossibility to perform is challenging. More often, force majeure will be seen as an event hindering or delaying the performance, which means that the parties won't be released from their obligations totally, even if a force majeure event is established. 

If frustration is established, then the contract is regarded as automatically discharged. This means that any future performance, which was meant to happen under the contract, is released. Law Reform (Frustrated) Contracts Act 1943 explains what happens to the payments made, expenses incurred and/or any services partially performed before the frustration took place. Generally speaking, payments can be returned, expenses and performed services can be compensated. However, no damages or loss of profits can be claimed. 

Russian Law Overview

In order to be exempted from a contractual liability pursuant to force majeure, a party, which is in breach, must prove that it has complied with all the formalities stipulated by the contract and the law. This includes notifying the other party of a force majeure event and performing all the necessary and possible actions to mitigate the losses caused by force majeure. As a general rule, force majeure is only valid within a certain period of time. After the force majeure event is over, a party must fulfil its obligations, if such performance is possible and unless otherwise agreed in the contract. 

In case of impossibility of execution in connection with the publication of an act of state power, the party has the right to recover losses from the state. In the Russian legal system, in the case of Covid-19, such a consequence is extremely unlikely. 

In case of a significant change in circumstances, the parties must first make every effort to negotiate the necessary amendments or a voluntary termination of a contract in question. Only in case of failure of negotiations, the parties are entitled to terminate the contract through the court. 

"Incorporating" Force Majeure Into Contracts by the Governments

Governments are trying to mitigate major economic losses by introducing various measures, including trying to help local companies establish a force majeure event. 

On January 10, 2020, the China Council for the Promotion of International Trade (CCPIT) announced that it would offer "force majeure certificates" to Chinese companies that failed to fulfil their obligations with foreign parties as the result of the government's efforts to stop the spread of virus. By the end of February 2020, CCPIT issued over 4,300 certificates (*1). Clearly, these certificates cannot serve as stand-alone proof that a force majeure event did take place indeed. They appear to be successfully used in Chinese courts, however, the English legal community seems to be sceptical about them (*2)

French Finance Minister Bruno Le Maire stated that "We are going to consider the virus as a case of force majeure" (*3)

ICC amended their model force majeure clause by including an epidemic into a Presumed Force Majeure Event (*4)

The Russian government is also taking the similar steps. In a decree by the Mayor of Moscow, released in connection with the virus, the current pandemic is explicitly labelled as an extraordinary and unavoidable circumstance (force majeure). The said decree will facilitate significantly the process of establishing a force majeure in the Russian courts by the Moscow based businesses. 

The Chamber of Commerce and Industry of the Russian Federation (RF CCI) confirmed that the regional chambers of commerce may issue the force majeure certificates to the Russian businesses. An extent to which such certificates will be accepted by the courts is a moot point, since today, by law, the RF CCI has the right to issue force majeure certificates only to parties to foreign trade agreements, but not domestic ones. The legal status of these "certificates" remains unclear. 

Needless to say, it remains to be seen how the courts around the globe will treat the announcements and the acts of the national governments aimed at effectively "incorporating" a force majeure into the contracts of national companies hit by Covid-19. 

Marianna Rybynok, Senior Associate, "Khrenov&Partners"
            Follow us
Digital Production