Fulfillment of contractual obligations during pandemic

Mar, 25 2020

Currently, it becomes more difficult to fulfill obligations undertaken earlier. Art. 416 of the Civil Code of the Russian Federation states that an obligation is terminated by the impossibility of fulfillment if it is caused by a circumstance arisen after the occurrence of the obligation, for which neither of the parties is responsible. At the same time, art. 401 of the Civil Code indicates that “a person who has not fulfilled obligations or has performed it improperly is liable if there is a guilt (intent or negligence), unless otherwise provided by law or contract”.

Further, the same article provides for an exception to this rule: a person who has not fulfilled or improperly fulfilled an obligation in conducting business activity is liable if he does not prove that proper performance was impossible due to force majeure, that is, extraordinary and unavoidable circumstances under the given conditions.

Thus, today, an entrepreneur needs to understand whether a pandemic is such an extraordinary circumstance that entails the indicated consequences, which consequences it entails and what needs to be done now.

  1. The spread of a new coronavirus infection was called an emergency and inevitable circumstance by Decrees of the relevant authorities of various territorial entities of the Russian Federation (Moscow region – March 13, Moscow – March 14, the rest – March 17-19) which led to the introduction of high alert regime. Thereby, the coronavirus epidemic (pandemic) can be considered force majeure.
  2. The Supreme Court of the Russian Federation stated in the Decree of March 24, 2016 No. 7 what options are provided to the debtor and the creditor in connection with the occurrence of force majeure circumstances. The occurrence of force majeure circumstances does not itself terminate the obligation of the debtor, if execution remains possible after they are removed. The creditor is not deprived of the right to withdraw from the contract if, as a result of the delay arising from the onset of force majeure circumstances, he has lost interest in performance. In this case, the debtor shall not be liable to the creditor for losses caused by the delay in the performance of obligations due to force majeure circumstances.
  3. However, in order to minimize its risks, the debtor is obliged to take all reasonable measures to reduce the damage caused to the creditor by force majeure, including notifying the creditor of the occurrence of such a circumstance, and in case of failure to fulfill this obligation, to compensate the creditor for the losses caused thereby.

It is important to be able to prove that it was the consequences of the pandemic that made it impossible to fulfill the obligation. For example, just the absence of funds or goods in the warehouse will not become such a circumstance. This circumstance will not be considered extraordinary if the obligation arose after the pandemic was recognized as force majeure.

Therefore, even now it is necessary to send a notice to the counterparty about the occurrence of force majeure circumstances and take measures to minimize its damage. In case of a conclusion of new agreements, it is necessary to discuss in advance with the counterparty which scenario during pandemic is considered force majeure.