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Covid-19: Contractual Relations in the Face of the Pandemic

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Emergency measures taken by government authorities in the face of the rapid spread of the novel coronavirus infection have had a tremendous impact on commercial activities. Under the existing restrictions, contracting parties often need to review the arrangements: some of them become practically impossible, the execution of others becomes extremely burdensome for the obligated party.

What opportunities does the law provide to overcome this situation?

1. FORCE-MAJEURE

The issue of whether the spread of the novel coronavirus infection represents a force majeure event is resolved individually in each case.
In order for the situation of non-fulfillment of obligations under the agreement to be recognised as a force majeure event, you will need to prove the following circumstances:

  • presence and duration of the force majeure circumstances, which will depend on such factors as the region in which the organisation operates, the term for fulfillment of the obligation, the nature of the unfulfilled obligation, etc.;
  • presence of cause-and-effect links between the force majeure circumstances and the impossibility of or delay in the performance of the obligations;
  • non-involvement of the party in the creation of the force majeure circumstances;
  • good faith actions of the party, that is, the adoption of measures to prevent (minimize) possible risks.

How to prove it?

If the contracting party under the agreement does not agree that the obligation was not fulfilled due to a force majeure event, you will have to prove the presence of force majeure in court. Correspondence with the contracting party, reference to state and municipal acts, a certificate of force majeure issued by the Chamber of Commerce and Industry, etc. can be used as evidence.

Why do you need it?

In the event of force majeure, the debtor is no longer liable for violation of the deadlines for the performance of the obligation, but this does not mean at all that the obligation under the agreement shall not need to be fulfilled. For example, if under the agreement you must supply the goods, but could not do so on time, then you must supply the goods later, however, you will be exempted from forfeits and other penalties.

In addition, the creditor has the right to withdraw from the agreement if, as a result of the delay, he has lost interest in the performance of the agreement.
The agreement may also provide for the right to terminate the agreement by any of the parties if force majeure remains valid for a certain time.

If the force majeure event has caused the complete or partial objective impossibility of fulfilling the obligation of a permanent (irremovable) nature, this obligation shall terminate in full or in the relevant part on the basis of Articles 416 and 417 of the Civil Code of the Russian Federation (hereinafter referred to as the “Civil Code of the Russian Federation”).

2. TERMINATION OR AMENDMENT OF THE AGREEMENT IN CONNECTION WITH A SIGNIFICANT CHANGE IN THE CIRCUMSTANCES

A significant change in the circumstances from which the parties proceeded when concluding the agreement is the basis for its amendment or termination, unless otherwise provided by the agreement or arises from its substance.

In other words, the agreement can be terminated or amended in court if the party proves that if it could have foreseen the advent of certain circumstances, the agreement would not have been concluded or would have been concluded on different conditions.

Judicial practice on this issue varies: similar changes in circumstances may or may not be recognised as significant depending on the specific situation. As a rule, the courts do not consider inflationary developments, a financial crisis, a change in the foreign exchange rate, a deterioration in the financial condition of a party to an agreement, including its bankruptcy, as significant changes in circumstances.

3. DEFERMENT AND REDUCTION OF PAYMENT UNDER REAL ESTATE LEASE AGREEMENTS

With the introduction of the Federal Law dated 01.04.2020 No. 98-ФЗ “On Amendments to Certain Legislative Acts of the Russian Federation on Issues Related to Emergency Prevention and Response”, the tenant under real estate lease agreements has gained the right to demand a reduction in rent due to the inability to use the property related to a high alert regime or state of emergency in the territory of the specific entity of the Russian Federation.
Whereas with respect to reduction in rent there is a possibility of a refusal from the lessor, with respect to allocation of a deferment and installment, the lessor has had the obligation to provide them1.

Who can apply for a deferment?

A deferment is provided for legal entities and sole proprietors operating in sectors most affected by the coronavirus infection, renting any real estate, with the exception of residential premises2.

For which payments is a deferment granted?

According to the general rule, a deferment is granted in respect of a fixed rental rate.
This means that if, under a lease agreement, you must also pay utility bills and (or) expenses for the maintenance of the leased property, then in this part a deferment is not provided, unless the lessor is exempted from payment for such services and (or) incurring such expenses during the period of high alert or emergency.

Terms of deferment

  • Debt arrears are payable no earlier than 01.01.2021 and no later than 01.01.2023 in stages, no more than once a month, in equal payments, the amount of which does not exceed half the monthly rent under the lease agreement; and
  • A deferment is granted in full for the duration of the high alert regime (for Moscow from 05.03.2020) and in the amount of 50% of the rent for the corresponding period from the date of termination of the high alert regime or state of emergency until 01.10.2020.

Please note that the establishment by the lessor of additional payments due by the lessee in connection with allocation of a deferment is not allowed.

 


1 Decree of the Government of the Russian Federation dated 03.04.2020, No. 439 “On Establishing Requirements for the Conditions and Terms for Deferment of Rental Payments under Real Estate Lease Agreements”.

2 A list of sectors, most affected as the situation has been deteriorating over the spread of the novel coronavirus infection, to provide primary targeted support is available here.

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