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On 17 March 2020, the Law of Ukraine “On amendments to certain legislative acts of Ukraine aimed at the prevention of occurrence and spread of coronavirus (COVID-19)” became effective, by which the list of force majeure events in Ukraine was officially supplemented by the “quarantines imposed by the Cabinet of Ministers of Ukraine” (Quarantine Amendment).

The Quarantine Amendment entitles the parties to the commercial contracts to invoke the force majeure provisions of the law and contracts to release them from the liability for non-performance of the contractual obligations, which occurs due to the temporary travel, transport, business and other bans and restrictions, imposed on the national and local levels to prevent the spread of coronavirus (COVID-19) in Ukraine (Quarantine).

Below we discuss when and to what extent the parties to the commercial contracts can be exempted from the liability under the force majeure provisions for non-performance of the contractual obligations during the Quarantine.

Whether Quarantine Amendment provides for automatic release from the liability

The parties to the affected contracts are not automatically released from the liability for non-performance of the contractual obligations based on the Quarantine Amendment. In each case, the affected party shall prove a causal link between the Quarantine and the affected party’s failure (inability) to perform under the contract (i.e., the affected party must prove that the Quarantine has caused the non-performance).

Pre-conditions to invoke the force majeure

The affected party must notify the counterparty of the force majeure event as soon as the affected party became aware of such event stating its claim for an exemption from liability and providing, where possible, proof of the existence of such event and the impact of the event on the affected party's ability to perform under the contract. The contract may establish the specific terms within which such notice to the counterparty shall be provided. A failure to provide such notice, as well as a failure to provide such notice within the specified term, may result in the impossibility of the affected party to invoke the force majeure exemption.

Mitigation

The affected party has an obligation to mitigate the effects of the force majeure event meaning that the affected party must prove that it has utilized its best efforts to overcome the impact of the force majeure event. Therefore, if the affected party failed to utilize its best efforts to overcome the impact of the Quarantine on its non-performance under the contract, it may not be released from the liability under force majeure provisions.

Remedies / Extent of exemption from liability

The reliance on the force majeure under the contract does not exempt the affected party from the obligation to perform its obligations under the contract. As such, the affected party may only be released from the civil liability for non-performance or delay (e.g., damages and/or interest). Some contracts also provide the parties with the right of unilateral early termination of the contract without penalties, if the essential purpose of the contract may no longer be achieved because of the force majeure event.

Proof of occurrence of the force majeure event

In Ukraine, the law authorizes the Ukrainian Chamber of Commerce and Industry (“UCCI”) to certify the occurrence of the force majeure events by issuance of the “force majeure” certificates.

Following the coronavirus outbreak, the UCCI has simplified the procedure for obtaining of the “force majeure” certificates. In order to obtain such certificate, the interested party shall electronically submit an application to the UCCI accompanied by the supporting documents with substantiation of the causal link between the Quarantine and its failure to perform the obligation under the contract. The separate applications shall be submitted in respect of each affected contract. Typically, the certificates are issued within 7 days upon submission of the application.

However, please note that if the issue of liability for non-performance under the contract is considered by the court, the “force majeure” certificate will not be binding on the court. The court will decide on whether the defaulting party shall be released from the liability for non-performance of the contract based on all evidence furnished in the case, including the “force majeure” certificate.

Ways of settlement

In all cases, the parties are highly encouraged to resolve the issues related to the non-performance of the contracts during the Quarantine by negotiating with the counterparties. For instance, the affected party may suggest to the counterparty the alternative ways of performing of the affected obligation in its notice on force majeure event. This may include a request for granting an extension to fulfil the obligation or suggestion to modify the obligation so that it can be properly performed under given circumstances. In any case, the counterparty, which did not receive the due performance under the contract, may bring an action for non-performance against the defaulting party before the court.

Recommended actions

  • Carefully review the force majeure provision in each affected contract, with particular regard to the notification requirements and available remedies.

  • The defaulting parties are advised to use the best efforts to mitigate the impact of the force majeure event on their ability to perform under the contracts, comply with notification requirements and timely apply to the UCCI for a “force majeure” certificate.

  • The parties should endeavor to resolve the issues related to the non-performance amicably, however, for a counterparty who receives a force majeure claim, there is always an option to enforce the contract in a court. It is also noteworthy that if the parties fail to adapt the contractual terms to the existing situation, the defaulting party may initiate termination of the contract or revision of the contractual terms in the court on the ground of fundamental change of initial business conditions.

If you would like to discuss any of the issues raised in this alert, please do not hesitate to contact us.

 


Additional notes

This LEGAL ALERT is issued to inform Baker McKenzie clients and other interested parties of legal developments that may affect or otherwise be of interest to them. The comments above do not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases.

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