Russian Federation: Coronavirus – Effect Of The Coronavirus On Contractual Relations And Statute Of Limitations

Overview

On 21 April 2020, the Presidium of the Russian Supreme Court (the "Supreme Court") issued digest No. 1 of clarifications on certain issues of case law relating to the application of legislation and measures to counter the spread of the novel coronavirus (COVID-19) (the "Clarifications") in order to ensure a uniform application of legislation by lower courts¹.

The Clarifications seem to elaborate on the recommendations previously published by the Supreme Court, which are set forth in Letter No. 7-VS-1848/20 dated 1 April 2020 of the Deputy Chairman of the Supreme Court - Chairman of the Judicial Board for Economic Disputes of the Supreme Court, Oleg M. Sviridenko, and Ruling No. 821 dated 8 April 2020 of the Presidium of the Supreme Court and Presidium of the Russian Council of Judges (the "Documents")².

For instance, in its responses to questions 2 and 5 of the Clarifications the Supreme Court confirmed our interpretation³ that the non-working days established in Decrees of the Russian President No. 206 On Declaring Non-Working Days in the Russian Federation dated 25 March 2020 and No. 239 On Measures to Ensure Sanitary and Epidemiological Wellbeing of the Population in the Russian Federation due to the Spread of the Novel Coronavirus (COVID-19) dated 2 April 2020 cannot be understood as non-working days within the meaning of the Russian Civil Code (the "Civil Code"), which traditionally refers to weekend days and public holidays (Articles 111 and 112 of the Russian Labor Code).

In this alert, we will review the Supreme Court's position on certain matters discussed in the Clarifications, which we believe to be of importance in light of the current epidemiological situation in the Russian Federation, and which have not been addressed in the Documents. Clearly, the restrictions imposed have had a significant effect on all affected businesses without exception. This alert will explore the various legal avenues open to parties in lease agreements so that they may adapt their legal relations to the ever-changing legal and economic situation.

1. Can the epidemiological situation, restrictive measures, or obligations to self-isolate be recognized as force majeure (Article 401(3) of the Civil Code), a material change in circumstances (Article 451 of the Civil Code), or as grounds for termination due to an impossibility to discharge the obligation (Article 416 of the Civil Code), including in connection with acts of state or local authorities (Article 417 of the Civil Code)?

In its responses to questions 7 and 8 of the Clarifications, the Supreme Court emphasizes a divide between:

• force majeure within the meaning of Article 401(3) of the Civil Code
• amendment to, or rescission of, the contract due to a material change in circumstances (Article 451 of the Civil Code)
• termination due to an impossibility to discharge the obligation (Article 416 of the Civil Code), including in connection with acts of state or local authorities (Article 417 of the Civil Code)

In relation to each of the above, Russian law, with a view to the Clarifications and other authorities, sets forth certain grounds for, and consequences of application which are discussed below.

1.1 Acts of the debtor in case of force majeure

The criteria applicable to force majeure events, which have been put forward by the Supreme Court in the Clarifications, are not new to Russian case law⁴.

Based on the approach adopted in Russian case law, force majeure events have two features that must both be present in a specific case: (1) extraordinariness and (2) unavoidability. The phrase "in a specific case" means that these features should be applicable to the specific case.

In order to be released from liability for damages, the debtor shall also prove that the events, which satisfy the criteria above, have a causal link to the impossibility to perform the obligation.

In regards to these criteria, the Supreme Court indicates in the Clarifications that "force majeure events must be established in light of the facts of the specific case (including the time limits for the discharge of the obligation, nature of the obligation, which has not been discharged and whether the debtor's acts were reasonable and undertaken in good faith, etc.)." These are often used by courts to determine whether the events in the specific case are extraordinary and unavoidable.

For instance, with reference to paragraph 8 of Resolution No. 7 of the Plenum of the Supreme Court On Application by Courts of Certain Provisions of the Russian Civil Code on Liability for Breach of Obligations dated 24 March 2016 ("Resolution No. 7") and existing case law⁵, circumstances are deemed extraordinary if they were, from an objective standpoint, exceptional, unusual, and unforeseeable. Nevertheless, the extraordinary nature of a set of circumstances does not automatically imply that "any fact of life" can amount to force majeure⁶.

With this in mind, a set of circumstances is considered unavoidable if any other market participant involved in a similar business to the debtor would have been unable to avoid them or their consequences.

We should also underscore that this release from liability for non-performance or improper performance of the obligation due to force majeure does not automatically free the debtor from the performance of the obligation in kind, which the contract contains.

1.2 Lack of funds as a basis for releasing the debtor from liability for failure to discharge obligations

The Supreme Court confirms in its response to question 7 of the Clarifications that a lack of funds does not constitute grounds for a release of the debtor from liability for failure to discharge the obligation. This position is consistent with Russian case law⁷.

Nevertheless, the Supreme Court adds that "if lack of funds was caused by the restrictive measures adopted by competent authorities, in particular, where there is a ban of certain activities, self-isolation rules have been adopted, etc., this may constitute grounds for a release of the debtor from liability for failure or partial failure to discharge the obligations subject to Article 401 of the Civil Code."

Thus, to avoid potential disputes related to force majeure circumstances, it is sensible to list in contracts as many examples as possible of events, which the parties recognize as force majeure, as well as to set out in detail the procedure to be followed by the parties if such events occur.

Alternatively, the parties may resort to the ICC's force majeure clause by incorporating it into the contract by reference⁸.

1.3 Impact of the novel coronavirus (COVID-19) on termination of an obligation due to an impossibility to discharge it (Article 416 of the Civil Code), including in connection with acts of state or local authorities (Article 417 of the Civil Code)

In its response to question 7 of the Clarifications, the Supreme Court raised the issue of considering the novel coronavirus (COVID-19), and acts adopted by state and local authorities, as grounds for full or partial termination of obligations under Articles 416 and 417 of the Civil Code⁹.

We believe that one of the main ideas behind this is to point out the divide between release from liability based on force majeure (Article 401(3) of the Civil Code) and termination of an obligation due to an impossibility to discharge it (Article 416 of the Civil Code). For the former, as the Supreme Court explains, a release from liability does not terminate the obligation, and given the temporary nature of force majeure events, does not release the debtor from performance when the circumstances allow. If the circumstances, which are beyond each party's responsibilities, have also led to a full or partial impossibility for the debtor to discharge the obligation, these may be fully or partially terminated based on Article 416 of the Civil Code.

However, the Clarifications are regrettably quite scarce surrounding this point and do not offer advice on which additional criteria the circumstances in question should meet to be deemed leading to a complete or partial impossibility for the debtor to discharge the obligation.

This lack of clarity is in all likelihood compensated by paragraph 10 in clause 21 of Digest No. 2 (2017) of the Supreme Court in relation to Case Law, adopted by the Presidium of the Supreme Court on 26 April 2017, which discusses that Article 416 of the Civil Code applies to circumstances where the impossibility to discharge obligations is objective, i.e. when the obligation in question could not reasonably be discharged by anyone else. If, due to a set of circumstances (including those related to the spread of the novel coronavirus (COVID-19)), the debtor cannot discharge the obligation personally, but is in a position to assign performance to a third party under Article 313 of the Civil Code, such obligation cannot be terminated on the basis of Article 416 of the Civil Code.

Conversely, Article 416 of the Civil Code does not expressly require the debtor to immediately notify the creditor as soon as becoming aware of the impossibility to discharge the obligation. Nevertheless, we trust that all reasonable and available steps should be taken to notify the counterparty when such circumstances appear, since such duty follows from Articles 1(3) and 307(3) of the Civil Code.

Article 417 of the Civil Code regulates situations when it is legally impossible to perform an obligation, i.e. when the impossibility arises due to acts of state or local authorities. If an obligation is terminated based on this provision, the affected parties who have suffered damages because of this, are entitled to claim damages from the Russian Federation, constituent entity of the Russian Federation or municipal unit, as the case may be, pursuant to Articles 13 and 16 of the Civil Code.

The legal impossibility to discharge obligations, in contrast to the general rules provided for in Article 416 of the Civil Code, is usually temporary, since it cannot be excluded that the relevant act that caused such impossibility at a later stage may be challenged and repealed. In this case, Article 417(3) of the Civil Code prescribes that the obligation is ultimately not considered terminated (i.e. it is renewed with retroactive effect), provided that the creditor has not repudiated the contract either before or within a reasonable time period after the legal impossibility to discharge the obligation has ceased.

Our understanding is that acts of state or local authorities, which are now adopted all over the Russian Federation, can give rise to a situation where a contractual party is unable to discharge its obligations. However, this issue can only be resolved by the court upon consideration of the specific case and taking into account all the facts.

1.4 Impact of the novel coronavirus (COVID-19) on amendments to, or rescission of, contracts due to a material change in circumstances (Article 451 of the Civil Code)

In its response to question 8 in the Clarifications, the Supreme Court points out that, unless otherwise provided in the contract or follows from its nature, circumstances that the parties could not foresee when entering into the contract may be the basis for amendment to, or rescission of, the contract pursuant to Article 451 of the Civil Code. This presupposes that the parties would not have entered into the contract or would have entered into the contract on significantly different terms if they could have foreseen the circumstances in question.

A key distinction between amendment or rescission due to a material change in circumstances and termination of obligations due to an impossibility to discharge them (Articles 416, 417 of the Civil Code) is expressed in the Clarifications. Article 451 of the Civil Code applies where, despite a material change in circumstances, there objectively remains a possibility for the affected party to perform its obligations, but performance under the terms of the contract is unfairly burdensome for that party.

This being said, the Supreme Court also clarifies that rescinding the contract should be preferred to amendments thereto by the court. When giving satisfaction to a claim by the debtor to amend the terms of the contract, the court must indicate which public interests would be negatively impacted by the contract being in the case of rescission as opposed to its amendment, or justify, what significant damage has been suffered by the parties in this case.

2. Suspension (Article 202(1) of the Civil Code) and extension (Article 205) of the time limits in light of the restrictive and self-isolation measures adopted

In its response to question 6 of the Clarifications, the Supreme Court raises two issues relating to time limits:

• whether the novel coronavirus (COVID-19) pandemic can be treated as force majeure for the purposes of suspending the time limits under Article 202 of the Civil Code
• whether the novel coronavirus (COVID-19) pandemic can be treated a compelling reason to extend the time limits under Article 205 of the Civil Code

Subject to Article 202(1)(1), the time limits can be suspended if filing the lawsuit was prevented by extraordinary and unavoidable circumstances in the specific case (force majeure).

Taking into account the discussion in section 1 of this alert, the court may only rule that there are grounds for suspending the time limits after considering the circumstances in the specific case, and by indicating that these satisfy the force majeure criteria.

In addition, the Supreme Court points out that the restrictive measures adopted to counter the spread of the novel coronavirus (COVID-19) cannot unconditionally warrant suspension of the time limits. This is particularly the case given that documents can still be submitted to courts by post or through the "Moi Arbitr" information system.

Nevertheless, as the Supreme Court underlines, the impossibility for certain individuals to turn to courts and file documents, including due to the restrictive measures adopted (obligation to remain in self-isolation, impossibility to turn to courts using online resources due to old age, health condition, or other circumstances) may be treated as a compelling reason for missing the statutory deadlines and constitute grounds for an extension subject to Article 205 of the Civil Code.

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Please be advised that this alert is not an exhaustive description of all the issues set out in the Clarifications, that it does not constitute a legal opinion on the issues discussed therein, and that it does not and cannot replace legal advice you may require in a specific situation.

Should you have any questions regarding this alert, please reach out to our Moscow or Saint-Petersburg teams.

Footnotes

1. See Digest No. 1 of clarifications on certain issues of case law related to application of legislation and measures to counter the spread of the novel coronavirus (COVID-19) issued by the Presidium of the Supreme Court on 21 April 2020 (26 April 2020) available at http://www.supcourt.ru/press_center/news/28855/

2. Please refer to our Impact of the Coronavirus Pandemic (COVID-19) on Procedural Time Limits and Functioning of Courts in the Russian Federation alert for a more detailed discussion of the Documents, published on 14 April 2020 on the website of Eversheds Sutherland, (26 April 2020) available at https://www.eversheds-sutherland.com/global/en/what/articles/index.page?ArticleID=en/coronavirus/Coronavirus-Functioning-of-courts-Russia

3. Please refer to footnote 2 above

4. See, e.g., paragraph 8 of Resolution No. 7, ruling No. F01-8485/2019 of the Commercial (Arbitrazh) Court for the Volgo-Vyatsky District of 25 February 2020 in case No. A39-1079/2019, ruling No. F07-10075/2019 of the Commercial (Arbitrazh) Court for the Northwestern District of 11 October 2019 in case No. A26-7699/2018, and ruling No. F02-6330/2019 of the Commercial (Arbitrazh) Court for the East Siberian District of 10 December 2019 in case No. A33-32261/2018

5. Please refer to footnote 4 above

6. See, e.g., ruling No. 3352/12 of the Presidium of the Russian Highest Commercial (Arbitrazh) Court of 21 June 2012 in case No. A40-25926/2011

7. See, e.g., rulings of the Supreme Court No. 305-??19-3815 of 22 April 2019 in case No. ?40-87254/2018, No. 304-??18-17602 of 09 November 2018 in case No. ?75-12649/2017, No. 302-??17-13552 of 02 October 2017 in case No. ?19-7922/2016, and No. 85-?09-1 of 03 March 2009

8. See Force Majeure Clause of the ICC (26 April 2020) available at http://www.iccwbo.ru/documents/RU_2020_icc_force_majeure_clause.pdf or http://www.iccwbo.ru/documents/icc-forcemajeure-hardship-clauses-march2020.pdf

9. Article 417 of the Civil Code serves as lex specialist in relation to the general regulation contained in Article 416 of the Civil Code. In other words, the rules of Article 416 of the Civil Code also apply to cases of impossibility to discharge obligations due to acts of state or local authorities, as long as these are compatible with the specific rules contained in Article 417 of the Civil Code

10. See, e.g., paragraph 2 of Ruling No. 821 dated 08 April 2020 of the Presidium of the Supreme Court and Presidium of the Russian Council of Judges

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.