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CEELM Covid-19 Comparative Legal Guide: Contracts in Ukraine

CEELM Covid-19 Comparative Legal Guide: Contracts in Ukraine

Covid-19 and Contracts in Ukraine
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Contributed by Avellum

How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

The Government of Ukraine has issued a series of regulations launching extraordinary measures aimed at combating the Covid-19 pandemic, namely:

  • it is prohibited to run culture, entertainment, religious, sport, social, and other events with more than ten participants
  • offline shops and shopping malls are closed except for pharmacies, gas stations, and grocery stores
  • restaurants, cafes, entertainment venues, gyms, and other public services (e.g., spa and wellness centers and beauty shops) are also closed
  • a quarantine has been introduced for educational institutions (e.g., schools, colleges, and universities) for the period between March 12 and April 3, 2020
    regular and irregular passenger transportation by auto transport in suburban areas and for long distances within Ukraine is prohibited for the period from March 18 and April 3, 2020
  • From March 18 until April 3, 2020 it is prohibited to have more than 10 passengers at once in one tram, trolleybus, auto transport, or bus that executes regular passenger transportation within each city
  • Subways in Kyiv, Kharkiv, and Dnipro must suspend their operations from March 17 until April 3, 2020
    railway connection between cities and regions of Ukraine must be suspended until the date of issuance of a separate Government decision in this regard
  • The Ministry of Healthcare must temporarily suspend execution of regular planned hospitalizations and planned surgical measures except for urgent and emergency cases. It is also necessary to prepare and reorient healthcare institutions to the extent possible tin order to ensure the treatment of infected patients who are in critical condition.
  • On March 17, 2020, the Parliament of Ukraine took things a step further, approving the Draft Law of Ukraine “On Amending of Certain Legislative Acts Aimed at Prevention of Occurrence and Spreading of Covid-19”, No. 3219 as of 16 March 2020 (the “Law”).

The Law, among other things, introduces the following measures:

(1) In the employment area

  • the Law establishes employers’ right to introduce remote work as well as the right to grant unpaid vacations for employees for the entire term of the quarantine (i.e., for a term exceeding 15 business days per year)
  • owners of businesses and/or executives of Ukrainian companies are able to rearrange their businesses' work schedules

(2) In the area of procurements of medicines, and medical devices

  • temporarily, for 3 months starting from the Law’s date of publication, the state must ensure a 100 percent advanced payment for medicine and related works and services that are procured with the purpose of combating Covid-19;
  • temporarily, for 3 months starting from the Law’s date of publication, operations related to the procurement of necessary medicines, medical devices, and equipment will be free of VAT and customs duty
  • The Ukrainian Government will execute control over the prices for medical goods and socially important goods.

(3) In the area of provision of administrative services, and conducting of state control

  • the term for consideration of all applications for receiving administrative services is suspended
  • foreigners and stateless persons who failed to exit Ukraine in time (i.e., who stay for more than 90 days cumulatively within a 180-day term without holding Ukrainian residency permit) are exempt from liability for exceeding the term of stay in Ukraine
  • the Law establishes a prohibition on the conducting of regular audits by state regulatory bodies. This rule, however, does not apply for the following types of state audits:

(i) those aimed at securing the sanitary and epidemiological security of the populace

(ii) state audits of businesses that rank as high risk as per the established criteria

(iii) state audits regarding the fulfillment of requirements for forming, establishing, and applying the administrated prices.

The Law also establishes certain other measures, for example:

  • the protection of interests of refugees, and internally displaced persons;
  • establishing increased remuneration for medical and other personnel who are directly engaged in activities related to preventing, localizing, and liquidating outbreaks of Covid-19;
  • exemption of individuals from liability for delays in payment for utilities
  • introduction of changes into the Code of Ukraine “On Administrative Offenses” and the Criminal Code of Ukraine establishing administrative and criminal liability for violations of the rules aimed at protecting the populace from the spread of Covid-19.

On top of that, the National Security and Defense Council of Ukraine ruled that:

  • starting from March 16, 2020, it is prohibited for foreign nationals and stateless persons to enter Ukraine for 2 weeks (i.e., before March 30, 2020). This rule does not apply to those foreigners and stateless persons who hold either Ukrainian temporary or permanent residency permits, as well as to accredited representatives of foreign diplomatic missions, consulates, and international organizations if there is a respective decision of the Ministry of Foreign Affairs in place
  • starting from March 17, 2020 for 2 weeks (i.e., by March 31, 2020) the frontier checkpoints of Ukrainian border are closed for air, railway, and bus connections. Ukrainian nationals can return to Ukraine on their own transport using a very limited number of frontier checkpoints.

Apart from the above requirements, a lot of businesses launched their own preventive measures, for example:

  • business trips (both abroad and within the country) are limited
  • to the extent possible, businesses have rearranged their work in a way that enables them to limit direct interaction between people (e.g., offline business meetings are cancelled, employees are encouraged to work remotely, where possible).

On a separate note, on March 17, 2020, the Draft Law “On Introduction of Changes to the Tax Code of Ukraine and Other Laws of Ukraine Regarding Support of Taxpayers During the Term of Validity of Measures Aimed at Prevention of Occurrence and Spreading of Covid-19”, No. 3220 as of 16 March 2020 was approved by the Ukrainian Parliament.

This draft law establishes temporary rules aimed at relief and suspension for payment of determined taxes for certain categories of taxpayers. Apart from that, the draft law introduces a moratorium of documental tax audits for the period from March 18 until May 31, 2020 (apart from tax audits related to VAT tax refunds of over UAH 100,000). The draft law also establishes relief from penalties and fines for the violations of the tax rules (with certain exceptions) for the period from March 1 until May 31, 2020.

So far, it is almost impossible to make an accurate estimation of the overall impact of the above measures on business. It is now clear that such measures have made an immediate adverse effect on businesses that operate in the retail and entertainment industries and the running of public events, hospitality and tourism, wellness, and transportation industries, etc. We, however, understand that going forward, these measures indirectly will affect other industries (e.g., banking businesses due to decrease of operations, businesses that require certain licenses and permits will not be able to operate due to suspension of terms for issuance of such authorizing documents, businesses where sales activities are mostly linked to offline interaction, and many others).

In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

Under Ukrainian law, if a party to a contract cannot perform its contractual obligations due to external events beyond its control it does not automatically lead to termination of the contract.

As a general rule, the availability of such events enables the affected party to claim exemption from liability for delays caused by events beyond its control (e.g., not to apply penalties and late-payment interests). The Law determines that Covid-19 pandemic (the “FM Event”), is an external event beyond its control that will serve as a ground for exemption from liability for delays in performing a party’s contractual obligations.

The affected party needs, therefore, to provide its counter-party with sufficient evidence that circumstances related to the Covid-19 crisis had a determining influence on the party’s ability to perform its contractual obligations.

Termination of the contract can be an ultimate measure if the delay caused by the FM Event exceeds a term indicated in the respective clause in the contract or if the fulfillment of the contract is no longer possible.

In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

When the performance of the party’s contractual obligations is adversely affected by an external event beyond its control but performance does not become completely impossible, such party is not eligible to claim for being exempt from liability due to FM Event.

It is, however, possible for the party to initiate the procedure of introduction of amendments in the contract or its termination due to significant change of business circumstances.

A change of circumstances can be considered significant if they have changed to such an extent that, if the parties could have foreseen such change, they would not have entered into such a contract or would have concluded it on other terms.

The UCCI also is empowered to issue certificates confirming the availability of a significant change of circumstances for the purpose of further amending or terminating commercial contracts.

If the parties agree to amend or terminate the contract, such amendments/termination clause must be introduced in the same form as the initial contract (i.e., in a notarized form for contracts concluded in a notarized form, in simple writing form for contracts concluded in written form).

If the parties fail to agree on the terms for amending the contract in order to bring it in line with the updated business circumstances, or for its termination, the agreement may be terminated or amended by a court ruling if all of the following circumstances exist simultaneously:

  • at contracting the parties were sure that the circumstances would have not changed
  • the change of the circumstances is caused by grounds that the affected party was not able to overcome acting with the due care and diligence
  • the performance of obligations under the contract could have affect the balance of commercial interests of the parties and deprive the affected party of the initially expected effect
  • it is not apparent from the essence of the contract or from the usual and customary business practices that the affected party shall bear the risk of change of circumstances

In such a case, the court, based on the demand of any party, may determine the consequences for termination of the contract, keeping in mind the necessity to ensure the fair distribution of expenses between the parties.

The introduction of amendments in the contract is possible based on a court ruling under exceptional circumstances when termination of such contract contradicts public interests or may cause damages for the parties in an amount that significantly exceeds expenses required for the performance of the contract on the terms determined by the court.

If yes, what considerations should be borne in mind by such parties, in particular in relation to:

Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

Typically, the terms and procedures for applying the consequences of FM Events are indicated in the clauses of each commercial contract. Notably, foreign trade contracts must have such clauses, while for internal contracts the presence of such a clause is not mandatory.

The following information can be found in the relevant clause of each contract with respect to the procedure for applying for the consequences of FM Events:

  • the term for notifying a counter-party regarding the available impediment and its effect on the party’s ability to perform its obligations under such contract
  • the determined form and details for such notice (e.g., it is possible to agree that such notice needs to be given via email or in writing using a regular mail)
  • the specific terms for recognition of certain circumstances as FM Event (e.g., the parties can determine specific circumstances that are not directly envisaged by legislation as FM Events for the purpose of fulfilling heir obligations under this particular contract, or the parties may also determine a specific body that will be authorized to recognize the circumstances as FM Events specifically for this contract)
  • determination on whether the performance of parties’ obligations under the contract needs to be postponed or the contract needs to be terminated due to FM Events
    rights and obligations of the parties in case a FM Event exists for a certain term (e.g., the parties may agree that if the FM Event exists for more than a certain term, each party may terminate such contract unilaterally)
  • the consequences and liability for non-fulfillment of the above-mentioned procedure
  • the term and procedure for notifying the counter-party regarding the termination of FM Events

In case the above-described clause is missing in a contract, the general terms of legislation apply.

Under Ukrainian law, the party that fails to perform its obligations under each specific contract due to FM Event must give relevant notice to the other party within a reasonable term. If the notice is not received by the other party within a reasonable term after the party who fails to perform knew or ought to have known of the impediment, the party is liable for damages arising from such non-receipt.

In order to be eligible to claim the above-mentioned release from liability, the party that failed to perform its obligations under the contract needs to receive a confirmation of the availability of the FM Event issued by the relevant notified body. Unless otherwise set out by the contract, the Ukrainian Chamber of Commerce and Industry and its territorial units (the UCCI) is the notified body that is authorized to confirm the availability of FM Events.

The party that would like to receive a confirmation that events related to spreading of Covid-19 must be considered as an FM Event for such contract needs to provide the UCCI with reliable evidence confirming that:

  • the events related to the spread of Covid-19 made it impossible for the party to fulfill its specific obligations under the particular contract in full or partially
  • the circumstances in question were out of that party’s control and were irreversible (i.e., the UCCI will consider whether such party could, theoretically, could have averted the negative implications and whether such party made reasonable efforts to do so)
  • the spread of Covid-19 has, for these parties, an extraordinary character (i.e., it was impossible to predict the circumstances at contracting).

It should be mentioned that the following events under no circumstances can be recognized as FM Events even if they directly or indirectly were caused by the spread of Covid-19:

  • financial and economic crisis
  • default
  • increase of the official and commercial currency exchange rate
  • non-fulfillment or improper fulfillment of obligations by debtor’s counter-parties under other contracts
  • absence of the necessary goods on the market, etc.

Given the above, the party that would like to benefit from being exempt from liability for non-fulfillment of its contractual obligations must carefully collect evidence and provide them to the UCCI for consideration in order to prove the causal connection between events related to the spread of Covid-19 and the party's inability to fulfill its obligations under the contract.

Guide Contributors For Ukraine

Mykola Stetsenko

Co-Managing Partner

mstetsenko@avellum.com

+38044 591 33 55

 

Bogdana Parkhomchuk

Trainee Associate

bparkhomchuk@avellum.com

+38044 591 33 55

 

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