The second month of the Russian-Ukrainian war has ended, and it would seem that businesses should not have any issues with force majeure.
However, in practice, some entrepreneurs believe that force majeure gives them the right not to fulfill their obligations to their partners while force majeure circumstances are in effect. Attorney Serhiy Lysenko, an expert in real estate, investment and IT, told the Foundation about such cases in his practice.
Ukrainian business has just started to recover from the shock, returned to the agreements concluded in peacetime and began to determine who owes what to whom.
Investment attorney Serhiy Lysenko explained what force majeure is, when it applies, and whether it affects the release of entrepreneurs from liability for improper fulfillment of obligations.
What is force majeure?
Force majeure is defined as extraordinary and unavoidable circumstances that objectively make it impossible to fulfill obligations under the terms of the agreement and/or obligations under laws and regulations.
Such circumstances include, but are not limited to
- threat of war;
- armed conflict or a serious threat of such conflict;
- enemy attacks;
- blockade actions of a foreign enemy;
- general military mobilization;
- military actions;
- declared and undeclared war;
- introduction of curfews, etc.
The Chamber of Commerce and Industry of Ukraine (CCI) issued a letter stating that the military aggression of the Russian Federation against Ukraine is a force majeure circumstance (a circumstance of insuperable force).
Who must prove force majeure
The burden of proof of the impact of force majeure on the fulfillment of contractual obligations rests with the party claiming it.
After all, Article 218(2) of the Commercial Code of Ukraine and Article 617 of the Civil Code of Ukraine provide that, unless otherwise provided by law or contract, a business entity shall be liable for breach of a business obligation unless it proves that proper performance of the obligation was impossible due to force majeure, i.e. extraordinary and unavoidable circumstances under the given conditions of business activity.
In turn, the managed party (the party to the contract that has the right to demand fulfillment of obligations) has the right to deny the existence of such circumstances and demand fulfillment of the obligation within the time period specified in the contract.
What to look for in the “force majeure” section of the contract?
The legislator gives us general ideas about what circumstances are recognized as force majeure; which authority will provide confirmation of the existence of force majeure circumstances and the consequences of their occurrence.
However, it is in the contract that the parties usually determine a more detailed method of applying the existing force majeure circumstances, in particular:
1. Possibility of correct interpretation of force majeure.
In the agreement, the parties recognize in which case force majeure circumstances arise for their legal relationship.
Lawyers usually specify in contracts under what conditions force majeure occurs and what evidence the obligated party must provide to prove it.
If there are no such conditions in the agreement, then the only thing left to rely on when settling disputes is the common sense of both parties.
2. Terms and method of notification of force majeure.
The force majeure clause of the contract usually specifies how and within what timeframe the party that has suffered force majeure is obliged to notify the other party of its occurrence and the consequences of not notifying the other party.
Tip: it is better to send a notice of force majeure by registered mail with a list of attachments. It is also better to assign an outgoing correspondence number and date to the force majeure notice, and indicate these details in the description of the letter’s attachment. After all, there is always a possibility that the parties will further consider force majeure in court.
3. What are the consequences of force majeure for the parties to a particular legal relationship?
The existence of force majeure, to which the obligated party to the contract refers, entitles it to demand that the liability provided for by law or contract not be applied to it.
The obligated party (the party to the contract that must fulfill the obligation) that refers to such circumstances must notify the managed party of them and prove the existence of a causal link between the force majeure and the inability to fulfill the obligation.
However, depending on the type of business, the consequences may vary:
- no penalties for failure to pay on time;
- termination of obligations (automatic termination of the agreement, as it becomes uninteresting for the parties);
- postponement of the fulfillment of obligations to the time after the cessation of these circumstances, etc.
There is a general rule: a party must fulfill the main obligation as soon as it has the opportunity to do so. Of course, unless otherwise provided by the agreement.
Business tips for determining force majeure
How to determine whether the war is a force majeure event in a particular business relationship? Recommendation:
- Carefully read the force majeure clause in the contract, if any, and determine the procedure and consequences of its application.
- Determine, based on evidence, whether military actions have affected the inability of the obligated party to fulfill its obligations under the contract.
- Pay attention to whether the terms of notification of force majeure have not expired.
- Determine the approximate date when the obligated party will be able to fulfill its obligations.
- If force majeure is confirmed, jointly decide how to act to maintain partnership and mutual respect.
Examples from our own practice. What can be considered force majeure in a time of war
1. The presence of hostilities in a certain area where the leased premises are located may be recognized as force majeure.
However, the landlord still needs to prove this fact, as it may deny that there is a direct link between the hostilities and the tenant’s inability to pay rent.
It should be remembered that the existence of force majeure only postpones the obligation to pay rent, not exempts it.
As a practical matter, the presence of hostilities near the leased property and the absence of a clear causal link between these actions and the inability to fully exploit the premises does not relieve the obligation to pay rent on time and entails foreseeable liability and possible termination of the agreement.
2. Mobilization of the company’s employees.
A clear example of the impact of force majeure on the performance of contractual relations is the mobilization of a specialist who has entered into a service agreement with a particular company. A copy of the military conscription certificate, military ID card with the relevant marks, etc. may serve as proof of such a circumstance.
3. A non-force majeure circumstance, for example, is the inability of a transportation company to deliver cargo to its destination due to the fact that the driver went to the terrorist defense and left the truck in an unknown place. Such a company should be held liable for breach of its own obligations.