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COVID-19: Force Majeure and International Commercial Contracts

COVID-19: Force Majeure and International Commercial Contracts

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The COVID-19 pandemic is making a significant impact on international commerce with Ukrainian counterparties involved. Interrupted supply chains of goods (especially if they were partly or fully produced in China), inability to provide services, perform works during quarantine, and to conduct regular business operations are just a few problems that lots of companies have encountered.

The so called “antivirus” laws adopted by the Parliament of Ukraine on 17 March 2020 qualify quarantine introduced by the Cabinet of Ministers as force majeure. This triggered a rash of force majeure declarations with a reference to the new rule, even in cases when quarantine had no tangible effect on performing contractual obligations.
In this regard, many bona fide companies raised two types of questions regarding force majeure:

(1) how to protect themselves from their unfair counterparties which illegally refer to force majeure
(2) whether quarantine and other restrictive measures introduced in Ukraine affect the ability to perform their own contractual obligations.

In both cases the action plan is almost the same.

What does it look like?

1. Check the wording of the force majeure clause in the contract:

a. what force majeure events are included therein?
b. what is the “standard” of influence that force majeure has on performance of contractual obligations – just an impossibility to perform the contract or other consequences as well?
c. is it necessary to obtain confirmation that the force majeure did occur and where?
d. during what time and how exactly is it necessary to notify the counterparty?
e. what are the consequences of the force majeure declaration?

2. Check the applicable law since it can supplement force majeure clause in the contract:

a. if it is the law of Ukraine that applies to the contract, apart from force majeure clause, it is recommended to analyse Article 14-1 of the Law of Ukraine “On Chambers of Commerce and Industry”, Article 617 of the Civil Code of Ukraine, as well as Article 218 of the Commercial Code of Ukraine.
If it is the possibility to refer to quarantine as a force majeure event that is under question, it is necessary to analyse what contractual obligations were to be fulfilled in March-April 2020, and what particular restrictions set by the Cabinet of Ministers made it impossible to fulfil them. In any case, causal relationship between force majeure and impossibility to fulfil the contractual obligations shall be checked.

b. if the law applicable to the contract is not Ukrainian, it is advised to check the default provisions of the applicable law on force majeure (if any), as well as the peculiarities of applying it in the relevant legal system.

c. if international instruments are applicable, e.g. the Vienna Convention of 1980, the UNIDROIT Principles, it is recommended to check the provisions set therein and align them with those in the contract.

3. Check the consequences of the force majeure declaration/non-declaration, in particular:

a. whether there is a maximum time limit for a force majeure event;
b. whether force majeure declaration will not result in termination of the contract;
c. whether force majeure declaration under one contract has negative impact on other related contracts (e. g., within one project or within a chain of contracts);
d. whether it is necessary to declare the occurrence of a force majeure to the counterparties (e. g., insurance company or bank);
e. what are the consequences of a failure to notify of a force majeure event or to notify thereof within a specified time limit.

4. Be extremely careful in communications with your counterparty. Keep the records in writing and record audios (with an appropriate warning thereof). It can be of crucial importance for further dispute resolution, if it comes to that. If you agree to modify the contract within the process of communication, it will facilitate further execution of the contracts.

5. Collect evidence, including media coverage, and if necessary, apply to the competent authority specified in the contract in order to confirm occurrence of the force majeure event.

Additionally, it is essential to maintain internal track record (internal orders, etc.). This is the evidence which further will be of great importance while qualifying a particular event as a force majeure. The certificate issued by the CCI or other competent authority is only one piece of evidence which the arbitral tribunal or court will consider along with others.

6. Treat new contracts with the due attention. Generally, measures which existed or could be foreseen at the time of the signing, cannot be qualified as force majeure.

! Companies with an insurance policy are strongly recommended to look through it. Even if the consequences of pandemic and quarantine are not explicitly indicated therein, it is necessary to analyse the provisions of the policy in order to check whether it covers situations like these. If it does, then it is required to follow instructions provided in the policy, including that to notify the insurance company in order to maintain the right for a compensation.

By Olena Perepelynska, Partner, Integrites

Integrites at a Glance

INTEGRITES is a full-service law firm with the head office in Ukraine, offices in Kazakhstan and Russia, and representative offices in Germany, the Netherlands, and the UK.

We provide legal services to companies seeking comprehensive advice on large deals and major disputes, as well as day-to-day operation. INTEGRITES is highly recommended for its cross-border work (whether sophisticated transactions or complex dispute resolution) and for the projects in energy, in particular, renewable.

Our mission is to help companies concentrate on development of their business while we take care of the legal issues. With profound industry-focused expertise, we deliver legal solutions that add value to the business of our clients and help them successfully handle legal challenges.

In 14 years INTEGRITES has served more than 850 clients from around the globe, including Fortune 500 companies and international financial institutions. Clients in our portfolio are recognized leaders in various industries: from manufacturing, pharmaceuticals, and retail to agriculture, logistics, and renewables. Currently 80% of the companies we serve are international.

INTEGRITES has been consistently recognized by the leading international legal directories and rankings: Chambers Global/Europe, The Legal 500 EMEA, Who’s Who Legal, IFLR 1000, Best Lawyers, FT Innovative Lawyers.

All News about, and Legal Analysis by, Integrites can be found here.

Firm's website: www.integrites.com