COVID-19 and sanctions imposed on Russia: liability for default of obligations

In this article, we would like to highlight a problem, crucial in practical terms, of non-fulfillment of obligations by the parties to a contract in the present trying environment of the market economy.


What is meant by "FULFILLMENT OF AN OBLIGATION" as a matter of law?

If we analyze the current Russian legislation (Chapter 22 of the Civil Code of the Russian Federation), we come to the conclusion that the fulfillment of an obligation consists in performing an action (omission) prescribed by law or an agreement by the obligated party in favor of the other party and (or) in favor of a third party.

Paragraph 5 of Art. 10 of the Civil Code prescribes a presumption of good faith of participants in civil transactions and assumes that participants must act reasonably when entering into any contractual relations, and perform their duties with due diligence and observance.

At the same time, in case there are no external incentives, due performance of such obligation may be difficult or unreasonably delayed, which caused the legislator to capture various legal guarantees for the lawful behavior of an obligated person.

One of the important guarantees for fulfilling obligations by the obligated party (according to Article 310 of the Civil Code) is the inadmissibility of the unilateral refusal of the party to fulfill its obligation and (or) of unilateral change in its conditions. This guarantee rigidly fixes the terms of the obligation and makes it impossible to change (cancelling) them by the debtor at their own discretion (except for cases provided for by law or other legal acts, and as for an obligation related to entrepreneurial activities implementation by all its parties — also by contract).



Other important guarantees for the proper performance of an obligation are the Civil Liability of the obligated person for improper performance, as well as special securing methods.

What is the basis and condition for attaching Civil Liability to a party?
1. Failure to perform or improper performance of its obligations
2. Damage to property
3. Causal relationship between act and harm
4. Guilt, BUT A PERSON IS RECOGNIZED INNOCENT if he or she took all measures for the proper fulfillment of their obligation with due care and the diligence that was required by the nature of that obligation and the turnover conditions (paragraph 2, clause 1, article 401 of the Civil Code of the Russian Federation).

The main function of civil liability is compensatory and restorative! The creditor must receive compensation in connection with the breach of the contract by the debtor, due to which their rights will be restored.



In practice, very often there are cases when civil liability attaches without the debtor’s fault, i.e. we are talking about strict, no-fault, liability.

Paragraph 3 of Art. 401 of the Civil Code establishes nonliability due to force majeure.

Unless otherwise provided by law or contract, a person who has not fulfilled or improperly fulfilled their obligation in the course of entrepreneurial activity shall be liable, unless he or she proves that due performance was impossible due to force majeure, that is, extraordinary and unavoidable circumstances under given conditions.

But such circumstances do not include, in particular, the facts that the debtor’s counterparties violated their obligations, there are no goods on the market necessary to execute it, the debtor does not have the necessary funds.

As lawyers, we are often asked the question, what should be considered "extraordinary and unavoidable circumstances"?

We will answer, referring to the Decree of the Plenum of the Supreme Court of the Russian Federation dated March 24, 2016 N 7 cl. 8:

— Extraordinary means the exclusivity of the circumstance under consideration, which is not usual in specific conditions;
— Inevitability means that any participant in civil transactions, doing activity similar to the debtor’s one, could not have avoided this circumstance or its consequences;
— Relativity ("under given conditions").

As part of this issue, we consider it important to talk about the conditions for exemption from civil liability in the context of COVID-19, according to the jurisprudence of the Supreme Court of Russia.
The recognition of the coronavirus disease outbreak as force majeure depends on the category of the debtor, type, conditions, activity field and cannot be universal. Force majeure circumstances cannot be established in the abstract, without reference to a specific situation and to a specific debtor (question 7 of the Review of the Supreme Court of the Russian Federation dated April 21, 2020 N 1).
Lack of money can be recognized as force majeure only if the adverse financial consequences are caused by restrictive measures (in particular, a ban on certain activities, lockdown, etc.), and a reasonable participant in the turnover could not have avoided them (question 7 of the Review of the Armed Forces of the Russian Federation dated 04/21/2020 No. 1).

Recognizing COVID-19 as force majeure under Art. 401 of the Civil Code does not terminate an obligation if it is possible to be executed after it has disappeared. However, in this case, the debtor is not responsible for the delay in performing their obligation and for the losses caused by it, and the creditor can withdraw from the contract if he or she has lost interest in its performance (question 5 of the Review of the Supreme Court of the Russian Federation of 04/21/2020 No. 2020 No. 2).

Force majeure does not relieve the debtor from the duty to fulfill their obligations; the debtor is relieved from sanctions only (losses, penalties, interest under Article 395 of the Civil Code, double the amount of the deposit).

The final position of the Supreme Court of Russia in the context of COVID-19 as a force majeure:

"Unless otherwise provided by laws, in order to be released from liability for failure to perform its obligations, a party must prove:
a) existence and duration of force majeure;
b) causal relationship between the force majeure that has arisen and the impossibility or delay in fulfilling obligations;
c) non-involvement of the party in creating this force majeure;
d) good faith taking of reasonably expected measures by the party to prevent (minimize) possible risks."




Here are examples of judicial practice:

Decree of the Arbitration Court of the Lipetsk Region dated January 09, 2020 in case No. A36−4037 / 2020 — breach of the delivery time:
"Based on the circumstances of this case, the court found that on the basis of the Decree of the Administration of the Lipetsk Region dated March 26, 2020 No. 169 and the Decree of the Mayor of Moscow dated March 5, 2020 No. 12-UM, Coronavirus disease (2019-nCoV) was recognized as force majeure, which was valid from 04/01/2020 to 04/29/2020 (penalty calculation period).
Given the restrictive measures introduced, including the lockdown, quarantine measures and remote work, the Arbitration Court considers that the defendant’s delay in the delivery of goods from Moscow to Lipetsk was due to extraordinary circumstances that were beyond his control.
In addition, the defendant acted in good faith and took measures to deliver goods to the defendant on 04/29/2020 and 04/30/2020, that is, as soon as possible and during the period of restrictive measures established by the above acts in the Lipetsk region and in Moscow.
It is worth mentioning cases of breach of the contract for the medical masks supply:
The buyer made an advance payment, but did not receive the goods on time, so he filed a refund claim. The counterparty said it would deliver the goods later. The buyer was not satisfied with this, and he applied to the court. The buyer confirmed that he was not interested in late delivery of goods. Force majeure during the pandemic does not terminate an obligation if it can be performed after the restoration of normalcy. In this case, the debtor is not responsible for the delay. However, this force majeure is not universal. One needs to consider a specific situation.
The position of the court is as follows: "Since the deal concluded between the parties concerned the supply of medical masks required to be worn during the epidemic, these provisions on nonliability of the debtor are not applicable in this case." TOTAL: An advance payment, interest and the state duty cost was collected from the seller under Art. 395 of the Civil Code.
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Decision of the Moscow Arbitration Court dated October 27, 2020 in case No. A40−177 374 / 20−112−1379: Leased asset seizure — reference to the pandemic:
The lessee has stopped making payments. The lessor filed a lawsuit to seize the item. The lessee referred to the fact that due to the coronavirus pandemic, he suspended his activities, and the sales agreement contains a clause on nonliability in case of force majeure.
Position of the court: "The defendant’s arguments are subject to rejection, while the court takes into account that the sales agreement clause indicated by the defendant is not a basis for exemption from lease payments under the lease agreement concluded directly between the plaintiff and the defendant, as well as problems with the defendant’s current account is not a reason for their non-payment."



To date, Russia has developed judicial practice on the distribution of risks resulting from the INTERNATIONAL SANCTIONS.

THE SANCTIONS ARE NOT FORCE MAJEURE:

1. Case No. А53−3447/2018
Resolution of the Arbitration Court of the North Caucasus District dated September 13, 2018:
"The cassation complaint applicant assumes that the forfeit is not recoverable due to force majeure caused by the economic sanctions imposed by the EU and the USA against the Russian Federation."

Rejecting this argument, the Court of Appeal correctly pointed out that the imposition of economic sanctions is not grounds for releasing the supplier from the obligation to supply the equipment within the period established by the contract.

"The appeal arguments on force majeure caused by the economic sanctions imposed by the EU and the United States against the Russian Federation are rejected by the Court of Appeal on the following grounds.

The imposition of economic sanctions in itself does not indicate that this particular circumstance was the result of an increase in the equipment delivery terms, and also cannot serve as a basis for relieving the defendant from the duty to deliver the equipment within the time period established by the contract.

In addition, the Court of Appeal established that at the time the defendant supplied the equipment and to the present, the sanctions imposed on the Russian Federation are still in effect."



2. Case No. А81−763/2015
Resolution of the Eighth Arbitration Court of Appeal dated September 17, 2015:
"Sanctions are not grounds for terminating the contract (and not force majeure).



Analyzing judicial practice, we can conclude that the imposition of foreign economic sanctions is not among the circumstances that exempt the parties from fulfilling their obligations under contracts, and sanctions are perceived by the courts rather as an unforeseen risk in modern business conditions.

Should you have any questions or you are in need of legal aid in Russia, do not hesitate to contact us:
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