Force Majeure in the Context of Financial Crises and Endemics - Retrospective Overview

08 May 2020

The current quarantine measures in connection with the Covid-19 are unprecedented in terms of their scale, however we did see before both the endemics and the financial crises. Here we will take a look at several cases, arising out of the past crises in Russia and in other countries, as they might be helpful to understand how the courts will be approaching the upcoming cases in the current situation.

Bird Flu and Ebola

There aren't many reported legal cases concerning the past endimics, such as Swine Flu, Bird Flu or Ebola, probably, because these endemics did not have such an enormously quick spread, and consequently such impact, as the current Covid-19 does. Nevertheless, based on the available past case law, concerning the force majeure clauses, triggered by the endemics, it appears that the courts were always careful in releasing a party from its obligations under a contract even in the circumstances, when such release may seem justifiable.

In the year 2015, a major outbreak of the birds flu, or the avian flu took place. As one can image, it hit the farmers, particularly, those involved in the poultry industry, the hardest. In the case of Rembrandt Enterprises, Inc. v. Dahmes Stainless, Inc., Rembrandt, an egg producer contracted for a construction of the industrial egg dryer. Because of the 2015 birds' flu, Rembrandt had to destroy over a million birds, which made a new industrial egg dryer totally unnecessary. For this reason, Rembrandt tried to terminate the contract. The force majeure clause in the said contract was as follows: "Neither party shall be liable to the other for failure or delay in performance of the Work caused by war, riots, insurrections, proclamations, floods, fires, explosions, acts of any governmental body, terrorism, or other similar events beyond the reasonable control and without the fault of such party." [1]

Having carefully examined the above clause, the Court said that force majeure only covered the events, preventing the "Work" (in this case construction of the egg dryer), but did not cover the events, making the "Work" totally unnecessary. Consequently, the Court found against Rembrandt, holding that the contract could be terminated under the force majeure clause. This US case demonstrates how drafting of a clause itself may not be strong enough and may prevent a party from relying on it. As we wrote in our previous newsletters on the force majeure certificates"[2], the governments of some countries, including Russia, China and Italy are introducing or already introduced the certificates with an aim of effectively 'incorporating'' force majeure into the contracts of the affected companies. Again, as discussed in our previous newsletters, such certificates may not be easy to obtain and it is not yet clear how the local and the foreign courts will interpret them[3].

Another major flu outbreak, Ebola, took place in West Africa between 2014 and 2015. Several cases, concerning Ebola, ended up in the French courts. In the case RG 15/04263 the French courts confirmed that the Ebola virus does not constitute force majeure because no causal link was established between the virus and a decline in the activity of a company[4].

Obviously, it remains to be seen how the courts will interpret the force majeure clauses in connection with the current pandemic, which is different from the previous outbreaks of different kinds of flues. However from the case law available to us now, it seems that force majeure will be just as difficult to establish as in any other circumstances, as all the usual criteria will need to be satisfied, including the relevant casual links.

The Financial Crises in Russia

The current pandemic will undoubtedly bring the far-reaching economic consequences with it. These economic consequences will themselves create force majeure-like circumstances for many businesses around the world. For many countries, including Russia, this situation will be further complicated by the currency exchange rates fluctuations. To what extent it may be possible to claim any relief in this regard, if any at all? In this part of a newsletter we will focus on the Russian economic crisis of 1998, 2008 and 2014.

The Financial Crisis of 1998
In the year 1998 Russia went through a major financial crisis, as the result of which the Russian Central Bank devaluated the ruble and defaulted on its debt. Back in 1998, the Russian Central bank issued an order No.320-U "On the currency transactions of the residents" (further "the Order") and, together with the government of Russian Federation, issued a joint announcement "On the Politics of the Currency Rates" (further "the Announcement").

Based on the Order, as of 17 August 1998 the transactions related to the payment by residents to non-residents were suspended for 90 days, if the said transactions were in connection with:

• repayment of principal on financial loans received from non-residents for a period of more than 180 days;

• insurance payments on loans secured by a pledge of securities, including repo transactions;

• derivatives currency contracts.

At the same time, under the Announcement, the resident borrowers were not exempt from fulfilling their obligations upon the expiration of the time period specified in clause 1 of the Indication, as well as from paying interest restrictions on relevant obligations during the period of validity.

Many businesses, which found themselves in these rather challenging circumstances tried to rely upon art.401 of the Russian Civil Code. The said articles provides, that an entity, which has not fulfilled or improperly fulfilled its obligation in carrying out entrepreneurial activity shall be liable if such entity does not prove that proper performance was impossible due to force majeure, that is, extraordinary and unavoidable circumstances under the given conditions.

In the case No. A40-39450/98-55-391 OJSC "Russian Credit Bank" filed an appeal requesting to annul the decision of the Moscow Arbitration Court of 12 December 1998 regarding a recovery of USD 321 and 76 cents from the bank (interest for non-execution of a settlement transaction) and USD 112 and 82 US cents (interest on borrowed money funds) based on the fact that the plaintiff's order to transfer 10,000 US dollars was not executed in connection with force majeure events. The plaintiff successfully relied upon the 90 days moratorium, referred to in the Order.

It was held that the bank could not procure a transfer of USD 10,000 on its client order, placed on 25 August 1998, and therefore, the bank was not liable to pay any interest and/or any other kind of penalties. This decision was based on a combination of art. 401 of the Russian Civil code referred to above, and the Order. In other words, the Order effectively constituted a force majeure event for the circumstances of the present case.

In the case No. А40-36998/98-30-465 with a similar set of circumstances, the bank was also prevented from procuring a transfer on its client behalf, because of the restrictions, imposed by the Order. Again, it was held that s.401 was rightly relied upon by the bank, given the effect of the Order.

Would a foreign court take the same decisions, had it have to apply the Order in the context of a different jurisdiction, is an interesting question. The governments around the globe do adopt different measures to counter the spread of the Coronavirus and to rescue the economies at the same time. Such measures maybe seen as constituting a force majeure in the local jurisdictions, but will the same be true in a different jurisdiction remains to be seen.

The Financial Crisis of 2008 - 2010
The Financial Crisis of 2008-2010 hit not only the Russian economy, but was a major global economic crisis. At that time the Russian government and the government of Moscow took a number of measures to support the Russian businesses, however no specific acts, allowing to regard the crisis as a force majeure, were passed.

In the case No. A82-5527/2009 OJSC Avtodizel (Yaroslavl Motor Plant) filed an appeal with the Federal Arbitration Court of the Volga-Vyatka District, against the decisions of the lower courts regarding a collection of the RUB 321,999 debt under the contract for the repair of loaders dated 24 January 2008. The claim was dismissed. The court held that the appellant tried to get a relief from its obligations on the basis of the circumstances, arising out of the world financial crisis. Such decision was given on the basis, that the business entities carry out their activity with a certain degree of risk and are responsible for the improper performance of their obligations regardless of whether they are at fault (paragraph 3 of paragraph 1 of Article 2, paragraph 3 of Article 401 of the Civil Code of the Russian Federation). The financial and economic crisis in the world economy cannot be attributed to the force majeure circumstances due to an absence of such a qualifying attribute as inevitability. On top of this, Chapter 26 of the Civil Code of the Russian Federation does not provide for a change in the financial and economic situation in the world to be a sufficient ground for terminating the key contractual obligations.

In the case No. 40-14379/08-23-167 LLC "Dental Doctor Plus" filed an appeal to the Federal Arbitration Court of the Moscow District on 30 December 2009, against the decision of the lower courts, satisfying the claims of the Moscow City Property Department. Similar to the above, case No.A82-5527/2009, the plaintiffs did not manage to demonstrate that their circumstances went anywhere beyond the difficulties, which were being faced by other businesses due to the world financial crisis, which were not regarded as the force majeure circumstances, covered by the above mentioned art. 401 of the Russian Civil Code.

The Financial Crisis of 2014
Same as in 2008, in 2014 the Russian government also passed a number of legislative acts to rescue the businesses, hit by the crisis, and same as in 2008, there were no legislative acts, which would allow to envision the world financial crisis of 2014 as a force majeure. As the result, there were not many cases, in which either party tired to rely on force majeure to alleviate itself from any contractual obligations, affected by the crisis.

In the case No. A40-37402/13 the Moscow Arbitration Court, by its decision of 30 September 2015, specifically confirmed that neither the loss of price benchmarks, nor the anomalous nature of the market indicators, nor the financial crisis can relieve a trustee of the liability for the losses caused. The court emphasized, that the financial crisis and the loss of price benchmarks are not covered as the qualifying circumstances provided for in Article 1022 of the Civil Code of the Russian Federation. The crisis cannot be attributed to the force majeure circumstances; therefore it does not relieve the parties to a contract from liability for a failure to fulfil their obligations.

Covid 19 - Establishing Force Majeure in the Russian Courts
As one can see from the above summary of the Russian case law, a force majeure is likely to be established, when there are relevant regulatory acts of the competent authorities in place, particularly those containing prohibitive or restrictive measures of the authorities. Such restrictive measures were successfully relied upon by the plaintiffs in the cases No. A40-39450/98-55-391 and А40-36998/98-30-465, referred to above in connection with the 1998 crisis.

In the case No. A53-10346 / 2008, force majeure circumstances in the Kerch strait on 11 November 2007 were a well-known fact and were confirmed by publicly available information, an act of investigation of the accident of 12 December 2007 and a preliminary opinion of an independent expert - Marine Engineering Bureau of 21 November 2007 No.11/21. This is why the force majeure was invoked successfully in this case.

Force majeure will not be established, if the circumstances behind it could have been foreseen, and if there are no regulatory acts of the competent authorities, containing relevant prohibitive or restrictive measures. For example, in case No. A53-15421 / 2007-C3-25, the adverse weather conditions (drought) relied upon in the statement of claim were not regarded as the force majeure circumstances, relieving an agricultural company from its liability to the bank. Financial difficulties caused by the drought, which led to the company's inability to pay, were not unforeseeable. As we saw already, the financial problems, caused by the world financial crises also do not qualify as force majeure.

It is worth noting that the legal precedents play a key role in being able to establish force majeure in the Russian court. As we saw, it must be impossible to perform the obligations because of the circumstances, which must be extraordinary, unforeseeable, and inevitable. Accordingly, the coronavirus pandemic may well be regarded as a force majeure by the courts, subject to the conditions specified above, and also subject to the courts passing the relevant decisions, on the basis of which further case law practice in the Russia will be formed.

One should bear in mind, that force majeure circumstances do not exempt from fulfilment of the obligation itself, but only from the consequences of delay, compensation for damages, payment of forfeit and other civil liability. So far the Russian courts have not passed any decisions regarding force majeure in the context of the current pandemic.

Anna Burdina, Project Manager, Khrenov&Partners
Maruanna Rybynok, Senior Associate, Khrenov&Partners

            Follow us
Digital Production